Containing Ocean Costs
Shippers use overseas consolidation, strategic loading tactics, and container sharing to cast off ocean transportation’s financial burden.
In the old days, merchant sailors caught in a storm on the high seas were often forced to toss cargo overboard to keep their ship from sinking. In today’s rough economic waters, companies also are trying to lighten their loads. But instead of dumping cargo, they’re cutting costs.
For companies importing goods via ocean carrier, fitting more cartons into a container here, saving a little on labor there, and directing high-demand product to specific U.S. markets can make a big difference to the bottom line.
How are importers removing excess costs from ocean shipments? Here are some recent trends.
OVERSEAS CONSOLIDATION: COMBINE AND CONQUER
Consolidation is a tried-and-true way to save transportation dollars. In their domestic operations, many U.S. companies already combine smaller shipments into full truckloads when they can. Importers may seek similar benefits by consolidating at the point of origin.
Overseas consolidation centers receive finished goods from multiple suppliers—and sometimes from multiple countries—and assemble them into full containerloads. Each container then travels by ocean to the appropriate stateside distribution center (DC) or store.
Overseas consolidation cuts transportation costs by letting shippers use full containerload service rather than less-than-containerload, and by fitting more product into full containers. "Dividing the cost of one container by more cargo reduces the transportation cost per unit," says Marc Heeren, senior director for supply chain development at Damco, a Madison, N.J., logistics service provider.
Today, many companies find an overseas consolidation strategy attractive. "U.S. import growth, stockkeeping unit (SKU) proliferation, and DC bypass programs have led to increased interest in origin consolidation," says Jeff Bumgardner, vice president, North America, for MOL Consolidation Services (MCS) in Concord, Calif.
The economic downturn has also sparked greater interest in consolidation at origin. With U.S. consumers spending less, companies have scaled back on inventory, placing smaller orders with suppliers. "Smaller quantities call for consolidation to maximize loadability and meet shipment windows and delivery dates," Bumgardner says.
Consolidating overseas is part of the larger trend of saving money by performing fewer logistics functions in the United States. Overseas facilities, especially in Asia, can often accomplish the same work for less money.
Importers are among those developing interest in the notion that there are gains to be made overseas. "The international logistics portion of their supply chain is the final frontier for achieving cost savings and improving speed to market," Bumgardner says. Fortunately, shippers have an improved arsenal of tools to help manage vendors and track merchandise status overseas, making these operations more practical.
For some shippers, the overseas consolidation facility serves strictly as a replenishment center. A company might still use a domestic DC for scheduled deliveries. But if a U.S. store requires small quantities of numerous products to refill its shelves, the overseas facility consolidates those orders in one container.
Many importers and retailers operate replenishment centers in the United States. "They realize they can perform that function at origin with less expensive labor, and that being closer to vendors gives them better control," says Anthony Chiarello, executive vice president and chief operating officer at NYK Logistics in Secaucus, N.J.
Consolidating inventory overseas, rather than sending separate shipments from each supplier to a DC in the United States, also helps companies better match supply to customer demand. "The higher in the supply chain a company maintains its inventory, the more flexibility it has in sending it to different markets," Heeren says.
One of those markets might even be a local one because many U.S. retailers now operate stores in Asia, or plan to in the future. "They use consolidation centers not only for replenishment to U.S. locations, but also as a consolidation point for goods moving into a local Asian store network," says Chiarello.
As an additional benefit, overseas consolidation supports sustainability efforts. Companies that move goods in fewer, better-targeted shipments shrink their carbon footprint. "That benefit may drive the decision toward starting a consolidation operation," says Heeren.
Making It Work
Consolidation at origin is not a new strategy. Women’s apparel maker Liz Claiborne was a pioneer of the concept, having launched its program with Maersk Lines’ Mercantile division (now Damco) in the 1970s to consolidate product from factories in Hong Kong and Japan. Today, Liz Claiborne consolidates shipments at numerous facilities in the Pacific Rim, South Asia, and Central and South America.
Although the core process is the same, new technology and services offered by the consolidator have brought many improvements to Liz Claiborne’s strategy. For example, the consolidator now makes decisions that the company used to make internally.
"There’s no reason for an employee to look at every purchase order," says Frank Saffioti, director of logistics at Liz Claiborne in New York. Armed with key data, a good consolidator will help analyze the product flow, then make the right decisions on the client’s behalf.
Plymouth, Minn.-based apparel retailer Christopher and Banks has practiced overseas consolidation for more than 10 years. The company hasn’t yet used that strategy with its new freight forwarding partner, MCS, but plans to start consolidating small orders in MCS’s Yantian, China, facility.
"Transporting a 40-foot container costs significantly less than two 20-foot containers," says Chris Carlson, director of global logistics and customs compliance, Christopher and Banks.
Factory Loads Vs. Consolidation
Charlotte, N.C.-based department store chain Belk Inc. also switched to MCS as its overseas consolidator in late November 2009. Although the company has been consolidating at origin for about 10 years, it’s using that strategy less these days, says Diane Hartjes, director of private brands and customs compliance at Belk.
"The company is growing, and because we’re importing more, we’ve chosen factory loads over consolidation," Hartjes says. "However, if we can’t fill a 40-foot or 20-foot container, we’ll use a consolidator to ship goods combined from several of our smaller vendors."
STRATEGIC LOADING TACTICS: OPTIMIZING THE CUBE
As overseas consolidation spurs companies to ship more full containerloads, there’s more reason than ever to reconsider strategies for filling those containers. Does it make sense to pile as many cartons as possible from floor to ceiling—known as floor-loading or dead-stacking—to get more bang for the per-container transportation buck? Or should a company use pallets or slipsheets, which take up space in the container but let workers load and unload quickly with the help of forklifts or other equipment?
"Palletizing goods doesn’t deliver optimal cube utilization," says Mokhtar Bazaraa, senior vice president, supply chain solutions at Agility Logistics in Irvine, Calif. "It results in more containers and more ocean transportation." But increased loading and unloading productivity translates into lower labor costs.
"The tradeoffs depend on the specific application and situation," Bazaraa says. "In markets where labor costs are low, transportation cost savings outweigh added labor costs."
Giving Savings A Lift
Calculating the best approach for a particular load isn’t difficult. "Determine how loading and unloading affect handling costs and how improved utilization impacts transport costs. Then figure the supply chain inventory cost changes to calculate the best option," suggests Heeren.
Greater productivity may not always yield significant savings, says Bill Rehring, president of TOPS Engineering, a Richardson, Texas, developer of cargo load planning and optimization software. In much of the Pacific Rim, labor costs to floor-load a container are very low. "When you get to Long Beach, however, it can be expensive," he notes.
But the savings gained by fully loading a container outweigh the benefits of using pallets or slip sheets to ease materials handling. "Most container shipments are dead-stacked, and crews palletize the goods as they unload them," Rehring says. "That’s because the cube cost per container has increased from $2,000 to as much as $5,000."
The transportation/labor cost equation could change now that labor costs in China are rising, says Heeren, whose company uses TOPS’s MaxLoad software to optimize its loading plans. "Companies need to continuously review the most efficient strategy," he says. "The changing market affects transportation, labor, and capital costs."
Besides judicious pallet use to boost dock productivity, a new loading strategy on the horizon promises even greater labors savings, says Bazaraa. At least one Agility customer wants to organize products for delivery to U.S. retail stores before putting them on containers overseas.
"Suppliers can palletize up front, and not just by SKU or goods type," Bazaraa says. "They can palletize by store," mixing different products bound for the same store on a single pallet.
When containers reach the United States, there’s no need to deconsolidate loads and re-sort goods for shipment to stores. "It becomes a simple matter of cross docking," he adds.
This strategy potentially reduces more than loading and unloading costs. "It also reduces the cost of sorting and building up," Bazaraa says. Instead of performing those functions in the United States, the company gets the work done at the point of origin, where labor costs less.
"Few companies are doing this now," Bazaraa admits, but Agility has been discussing the strategy with customers, and one has plans to implement it in 2010.
While weighing container loading options, shippers should also consider how they package products for transportation. "Packing products well, or over-packaging them, helps protect against damage in transit. But producing the packaging also imposes a cost," says Rajiv Saxena, vice president, global supply chain engineering solutions at APL Logistics in Oakland, Calif. "And the more packaging, the less space you can use inside the container."
CONTAINER SHARING: JOINING FORCES
Just as one shipper may save money by consolidating shipments from different suppliers, two shippers may gain benefits by consolidating cargo in one container.
Several APL customers took this approach when separate divisions of one company decided to combine their previously independent supply chains and merge procurement activities. "They wanted to consolidate shipments and share containers," says Saxena.
Some companies also have expressed interest in sharing containers with trading partners. That’s especially appealing when a retailer and a clothing manufacturer, for example, source product in the same part of the world. Instead of taking delivery of the clothing in the United States, the retailer could arrange to have it shipped in a container with other goods that it’s importing.
The companies could save on transportation by building a full containerload. They might save further by shipping the brand owner’s product directly to the retailer’s DC, removing a link from the supply chain.
JCPenney, a major Liz Claiborne customer, could make a good partner for this kind of arrangement. "But volumes are currently so large, we load containers specifically for JCPenney and deliver them directly to its U.S. import centers," says Saffioti.
Companies that co-load with a partner face challenges such as allocating transportation costs, which can be difficult when two divisions of a company operate on different computer systems. "The costs are reduced dramatically," Saxena says, "but sometimes one division grumbles about subsidizing the other division."
For separate companies to collaborate in this way, the challenges may be even more daunting.
"They need the right working relationship, because agreements have to be made up front," Keller says. "For example, if one shipper delays the other, who’s responsible for the charges?"
"A suitable partner would be a company we trust, with a reliable supply chain," Carlson says.
APL hasn’t yet fully implemented a co-loading arrangement for international shipments, but interest is growing. "Shippers are looking for every opportunity to cut costs," Saxena says.
As shippers continue to seek out cost-saving opportunities, those that correctly work out the details—whether for co-loading, container optimization, or origin consolidation—can look forward to smoother sailing, even in stormy economic times.
Shippers may assume that overseas consolidation is a simple process, but plenty can go wrong as shippers and service providers try to synchronize the activities of vendors and carriers. “Vendors may deliver partial shipments,” says Marc Heeren, senior director for supply chain development at logistics services provider Damco. “They may get stuck in traffic and miss the shipment window. Or containers are not available, the vessels are full, or certification is not in place to export.” The strategy requires efficient coordination and management.
Another possible drawback to consolidation is that keeping inventory in an overseas consolidation hub, rather than in a domestic DC, can make it harder to respond to fluctuating demand for product in the United States. “If the origin hub is in Asia and the demand is in the United States, that creates a longer leg over which to ship product,” says Rajiv Saxena, vice president, global supply chain engineering solutions at APL Logistics in Oakland, Calif. A company that uses this strategy is challenged to maintain the right levels of inventory in the right place.
One challenge apparel company Liz Claiborne faces is timing multi-country consolidation. “We have to plan for shipments from different origins to meet at a consolidation point, then consolidate them to our final destination,” says Patricia Garofalo, the company’s senior manager of logistics for direct ship.
For companies that manufacture in more than one country and want to bring those products together in a consolidation center, it’s important to study the customs issues carefully. Must the consolidation facility be located in a free trade zone? If so, what are the ramifications? How do requirements differ for various types of goods?
Local customs regulations can create further complications. Until a few years ago, for example, China applied customs requirements to goods moving from one territory to another within the country. Trying to streamline the documentation process could be a significant challenge.
One key to performing consolidation well is to implement a strong standard operating procedure (SOP) with trading partners. “Clearly defining the rules of engagement, with a clear SOP, can lead to a successful operation,” says Frank Saffioti, Liz Claiborne’s director of logistics.
The biggest challenge that department store chain Belk Inc. must manage when working with an overseas consolidator is making sure that the service provider scans the bar-code labels that vendors have applied to each carton. “We have to make sure that all the origins with container freight stations can scan and pack a container correctly so we receive the electronic data interchange transaction,” says Diane Hartjes, director of private brands and customs compliance at Belk.
For apparel retailer Christopher and Banks, getting vendors to provide reliable information about inbound product is an area of particular concern. “The biggest challenge is getting accurate shipment volume,” says Chris Carlson, director of global logistics and customs compliance for Christopher and Banks. “The vendor might tell us the shipment will be 30 cubic meters [CBMs], then it arrives at 40 CBMs.”
When you fill containers with product from more than one vendor, it’s crucial to get those details right, so Christopher and Banks considers the vendors involved when deciding when and where to consolidate shipments. The company’s vendor compliance manual is an important tool for helping vendors understand what type of information they need to provide.