January 2007 | News | Trends

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Every January begins anew with equal amounts retrospection and anticipation. The logistics and supply chain segment is no exception, and so we offer the following predictions for 2007.

1. Economic Implications

As housing prices begin to drop, interest rates rise, and high energy costs remain static, many observers place the United States economy on the verge of an economic slowdown in 2007.

Devaluation in the housing market will slow consumer spending and retail sales, which, in turn, could trigger a global ripple as U.S. import demand and volumes shrink.

"The forecast reflects an economic soft landing, perhaps a few bounces, with overall growth only slowing, inflation concerns easing, and interest rates near, if not at, their peak. However, the economy is at a fork in the road and there is more uncertainty about where the various paths could lead than there was a year ago," the study reports.

Already, shippers have witnessed softening conditions as over-the-road carriers reduce rates in anticipation of a slowing economy, suggests Mike Regan, CEO, Tranzact Technologies.

"The fact that savvy shippers have been able to reduce their LTL and truckload rates during the fourth quarter-traditionally the worst time to negotiate rates-is significant. Carriers are genuinely concerned about the possibility of a recession in 2007 and its impact on their operations," he says.

Carriers share a similar sentiment. "Will a softening economy be a temporary downturn or the start of a recession? Either way it has ramifications for any business," reports Rick O'Dell, CEO, Saia Motor Freight.

What these ramifications may entail is debatable, but certainly businesses will continue to streamline their supply chains to offset expected transportation-related costs, even if an economic downturn stifles capital investment.

As economists mull the short- and long-term impact of increasing inflation, the collapse of housing prices, higher interest rates, energy consumption and costs, and continuing fallout from the Iraq war, the U.S. transportation industry finds itself at a fork in the road, too—though both roads inevitably go through Washington.

2. A Changing Legislative Landscape

A changing of the guard in Congress will no doubt lay the groundwork for how U.S. government and the transportation industry approach infrastructure, security, and environmental strategies for 2007 and beyond.

To what extent Democratic leadership will diverge from the Bush Administration's current agenda is purely speculative, but early signs suggest the new Congress will push for additional security legislation that may well prove divisive for U.S. business interests.

A number of Democrats, among them Senator Joseph Biden (D-Del.) and House Speaker Nancy Pelosi (D-Calif.), have endorsed policies that would push for 100-percent screening of cargo at U.S. seaports—policies that could conceivably impede U.S. import trade.

Others appear to be taking a more direct approach to addressing extant transportation shortcomings. Jim Oberstar (D-Minn.), the newly elected chair of the House Transportation and Infrastructure Committee, has publicly acknowledged the nation's transportation infrastructure needs.

"We need to make real investments in our roads, airports, ports, and inland waterways. These are the arteries of our economy and they are falling into disrepair," he says.

While U.S. ports and airports have received significant attention over the past few years, given their inherent security liabilities, Congress has recently been pressured to address surface transportation initiatives as well.

Obstacles Remain

The same concerns that have weighed heavily on the trucking industry over the past few years will carry even more gravity into 2007 and beyond as U.S. freight volumes increase over the long term.

Many carriers and transport buyers have tried to mitigate capacity, cost, congestion, and labor issues by working together, and implementing technology and logistics best practices to rationalize supply chains to the best of their ability. But some obstacles remain beyond their control.

The state of U.S. transportation infrastructure is a recurring topic around corporate boardrooms, industry roundtables, and congressional chambers. There has been much discussion about long-term investment in roads, bridges, and highways, but to date, no collective national strategy exists for addressing these problems.

Proponents of such a vision harken back to the Eisenhower Administration's National Interstate and Defense Highways Act of 1956, which served as a catalyst for an integrated national highway system.

Privatization Questions

Instead, local and state governments have been selling toll roads and bridges to foreign-owned cooperatives to finance short-term improvement projects.

Even though privatization opens up revenue streams that the government has not, a few questions linger: Why haven't U.S. business interests been equally aggressive in supporting infrastructure investment and development at home? How can government and industry work together to stimulate more grass-roots efforts to fill this need?

While this debate continues to stew, industry and government alike are in agreement that U.S. railroads hold a major key to alleviating congestion and capacity concerns and fulfilling a greater role in the U.S. supply chain.

Intermodal growth has been on a steady upward tick the last five years—total rail intermodal traffic moves grew 5.6 percent between 2004 and 2005, according to the Intermodal Association of North America. By all indications, this trend will continue.

But the railroads, too, face questions about infrastructure and capacity limitations. All eyes will be on Washington this year when the bi-partisan Freight Rail Infrastructure Capacity Expansion Act, which proposes tax credits for businesses investing in railroad infrastructure improvements, will be up for vote.

3. From Outsourcing to On-shoring

Interest in China remains strong and U.S. businesses continue to court sourcing and manufacturing opportunities there and elsewhere in Asia to reduce costs. But equally important is supply chain flexibility, and many companies are considering dual and tertiary sourcing strategies to counter unforeseen global disruptions.

Willingness to expand offshore interests in Eastern Europe and Latin America will grow, but some businesses are considering bringing manufacturing back to the United States, Canada, and Mexico.

With transportation costs as they are, on-shoring allows companies to streamline total landed costs, quality issues, longer lead times, port congestion, and higher fuel costs, reports Bernie Hart, global product executive for JPMorgan Chase Vastera, in his 2007 Risks and Rewards.

As such, stateside consignees must perform comprehensive due diligence to address potential sourcing alternatives and how they mesh with current and future business strategies.

"Strategic sourcing studies look beyond typical unit cost or landed cost comparisons. Analyzing the impacts of potential sources to working capital, time to market (profit), and risk of disruption due to political and economic risk, physical supply chain risk (weather, natural disasters, security and health epidemics) is critical to good decision-making.

"Creating different 'what-if' scenarios that model real-world variability enables a company to understand a range of potential costs versus a single 'perfect world' estimate," Hart notes.

Reinforcing this trend, Cincinnati USA Partnership's Economic Outlook 2007 reports that U.S. manufacturing employment has stabilized if not started to grow modestly, despite offshore outsourcing trends.

"While manufacturing is unlikely to grow significantly, manufacturing employment should remain relatively flat over the next year, declining 0.3 percent in 2006 and 0.5 percent in 2007," the study indicates.

4. Technology and Process Improvement

Will 2007 be the year when RFID finally creates a wave in the supply chain? We know better than to stoke the yet-to-be-realized hype, but we will anyway. Some indications point to supply chain practitioners embracing the idea.

For example, over the next six years, the total North American RFID market for manufacturing and logistics is predicted to grow at a compound annual rate of nearly 20 percent, according to recent research by Frost & Sullivan. Dropping price points and increasing reliability have made RFID implementation a little easier for businesses to budget conceptually and economically.

Perhaps most importantly, the recognition that RFID is only one component of enhancing supply chain visibility and not an end-all solution is softening expectations and making its potential more feasible.

"Other advances such as the EPC, the proliferation of wide area networking and wireless communications are also incredibly important to supply chain visibility.

"In fact, an argument can be made that the advances in Internet technologies and the overall communications infrastructure are more key to supply chain visibility than the collection methodology itself," says Bobby Kaemmer, vice president, Cadre Technologies.

Furthering this observation, Kaemmer also notes that the ability to push the data collection aspect of the supply chain as far out as necessary-regardless of how information is captured-to include not only the major participants of a supply chain but also the minor players who may only be involved in a supply chain one time (such as a forwarder, a small transportation provider, or a crossdocking facility) is also of value.

What this suggests, then, is that supply chain process improvement is tantamount in importance to technology investment and implementation.

"Today visibility is limited to those players who have the communications and hardware infrastructure to support the collection and transmission of data to support 'visibility' initiatives.

"In the future, all supply chain participants must be enabled with not only the technology to collect information as efficiently as possible but also to communicate the information appropriately to supply chain stakeholders," adds Kaemmer.

Creating better synergies among supply chain partners continues to be a priority for U.S. businesses. Within this context, technology innovation will shape how companies interact with and engage suppliers, carriers, 3PLs, IT developers, and their point-of-sale customers.

"The role of transportation technology—not just TMS-is expanding. This demands visibility at all points so that disparate systems begin working together better," posits Rick Jordan, director, global logistics solutions group for ICG Commerce.

When businesses approach this level of collaboration and synchronicity, the door is open for more complex supply chain strategies—diversified sourcing and procurement, demand forecasting, demand-driven logistics, product lifecycle management, and reverse logistics, among others.

What Do You Think?

Political discourse on transportation and security issues is expected to reach a crescendo in 2007, which ultimately means transportation industry organizations, carriers, shippers, and intermediaries have a much greater role to play lobbying government for policies and legislation that protect their interests.

How are you making your voice heard? What supply chain due diligence are you performing to ensure your business is prepared for 2007 and beyond? Please let us know. E-mail: editor@inboundlogistics.com

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