Trends-December 2008

Pacific Coast ports have anchored U.S. trade during the past two decades, but shifting globalization and sourcing tides are altering domestic transportation currents. These changes are gradually recasting the U.S. intermodal footprint with potentially long-lasting implications, suggests a recent report by Drewry Supply Chain Advisors.

Intermodal routings linking major West Coast port gateways with the U.S. interior are under threat as container volumes drop and inland transport providers fail to properly invest in resources and infrastructure to support future growth, according to the London-based consultant’s whitepaper, U.S. Intermodal Today and Tomorrow.

Intermodal shippers face a dramatic reduction in the total size of the system, even as railroads increase their investments.

“Faced with a tightening market and rising demand, the railroads have chosen to up their prices rather than invest in more capacity, in the mistaken belief that they have a captive market,” says Philip Damas, director of Drewry Supply Chain Advisors.

Drewry drilled down the total transport costs of shipping containers to and from U.S. interior points via the West, East, and Gulf Coasts and the expected fall in vessel-related costs following the Panama Canal’s expansion. For many destinations in the eastern United States, West Coast port routings are much more expensive than all-water service elsewhere.

Given the rising importance of intermodal transportation in the United States and industry’s ongoing courtship with Asia sourcing, it remains to be seen whether this trend has legs. Still, economic forces and infrastructure improvements favor continuing growth of Gulf and East Coast port routes for Asian trade, and the swing away from the West Coast could intensify in the decade to come.

“Intermodal costs are certain to keep rising, while all-water costs will continue to fall, which means that the land-bridge route will become less economic than the all-water route except for very time-sensitive goods,” Damas concludes.

‘Stock’ Compensation

Here’s an incentive for warehouse employees: Salaries are trending up, according to the Warehousing Education and Research Council’s (WERC) 2008 Warehousing Salaries and Wages study.

The survey, which WERC conducts every two years, provides an ongoing look at compensation trend lines for warehouse positions, as well as up-to-date statistics across the industry.

Among exempt employees, median salaries for traffic managers, general managers, and office managers increased 17.9 percent, 17.6 percent, and 16.5 percent, respectively. By contrast, compensation for sales positions at all levels declined by as much as 16.2 percent, in part due to a loss in bonuses.

Warehouse workers enjoyed the highest percentage gain among hourly employees, with a 7.1-percent increase in median wages. Customer service representatives’ pay rose 5.4 percent, widening the gap nearly 30 cents per hour between their compensation and the second-highest paid position—shipping and receiving clerks.

TMS Market Steps Up

With so much attention paid to reducing transportation costs amid fluctuating fuel prices and patchy demand, it’s little wonder that the transportation management systems (TMS) market has once again exceeded growth projections, rising nearly 10 percent in 2007 to almost $1.2 billion (see chart below), according to ARC Advisory Group’s latest report. The market continues to show positive momentum in the first half of 2008, with more than two-thirds of surveyed TMS vendors reporting increased sales and larger pipelines compared to the first half of 2007.

“2007 was a banner year for almost all TMS vendors,” says Adrian Gonzalez, director of ARC’s Logistics Executive Council and author of the study, Transportation Management Systems Worldwide Outlook. “Although there were some changes in market share rankings, the reality is that most vendors continue to grow their revenues and client bases. In short, there are plenty of TMS sales opportunities available in the market for all vendors to benefit.”

ARC forecasts the TMS market to exceed $1.6 billion by 2012, representing a compounded annual growth rate of 7.4 percent during that period. But some unresolved factors might limit growth moving forward.

The financial crisis, coupled with a slowing economy, is by far the biggest threat facing the TMS market in the coming year. “It is unclear at the moment which path TMS buyers will take next year,” says Gonzalez. “On the one hand, companies often look to reduce costs during weak economic times, as a way to boost net income and earnings per share. Transportation is a natural target because most C-level executives still view it as a cost center and low-hanging fruit opportunity to add hundreds of thousands, or even millions of dollars, to the bottom line. Therefore, from this perspective, the economic environment could benefit the TMS market.

“On the other hand, companies also have a tendency to delay IT investments during tough economic times, so it’s highly probable that TMS vendors could see longer sales cycles in 2009, at least during the first half of the year,” he surmises.

Supply Chain Reciprocity: The Merits of Being Nice

Sometimes it’s not what you say that’s important—it’s how you say it. In an industry powered by the exchange of goods and information, the secret to long-term success may lie in the emotional interplay among supply chain partners. Incentivizing performance can be as simple as sharing a laugh with your business associate. Conversely, a hard-line approach to negotiating contracts can create a culture of antagonism that is counter-productive and enduring.

A recent report, Social Preferences and Supply Chain Performance: An Experimental Study, authored by Christoph H. Loch of INSEAD and Yaozhong Wu of the National University of Singapore Business School, underscores the importance of social behavior as a “dangling carrot” for successful supply chain collaboration. Social preferences have a significant impact on supply chain decision-making, as competing for friendliness often triggers a circle of reciprocity that exceeds contractual bounds.

“People’s actions in economic transactions are determined not only by incentives; incentives alone may cause people to be calculating rather than oriented toward a win-win,” Loch and Wu write. “Behavior is also influenced emotionally by social preferences. In particular, people care about status (how much do I have relative to you?) and reciprocity (if you were nice to me, I want to reciprocate; if you were not nice, I want to retaliate).”

Loch and Wu conducted an experiment where individuals repeatedly interacted in a price-sensitive supply chain situation. They found that when status considerations matter, partners act more competitively, trying to out-do the other side.

“If reciprocity considerations are important, the partners can start a ‘virtuous cycle’ of establishing a pattern of win-win actions, sustained over time,” they note.

These results suggest that supply chain managers should not rely on financial incentives alone to drive performance. Instead, compensation can be bolstered by a commitment to building mutually constructive relationships. Poorly framed contracts, by contrast, may destroy collaboration by emphasizing “winning,” thereby pitting people against each other.

The Power of One

When times are hard, businesses often contract with a herd-like mentality, delaying investments and sticking to core operations. Some enterprising companies, however, are shepherding innovation and economy by taking a similar, albeit proactive, approach to consolidate purchasing power.

In an industry decimated by the current economic crisis, Wabash National, a Lafayette, Ind.-based truck-trailer manufacturer, has launched the Transportation Equipment Purchasing Consortium (TEPC) to drive more collaborative sourcing.

“The main objective of TEPC is to identify and increase efficiencies and economies of scale in the procurement of raw materials, component parts, and services, therefore creating an economic benefit for its members,” says Steve Miller, Wabash National’s vice president of supply chain management.

Each member of the consortium is a manufacturer or other business associated with the transportation industry that can benefit from a herd approach to strategic sourcing. Other members include Kentucky Trailer, a manufacturer of custom moving vans; Utilimaster, which custom builds walk-in and parcel delivery vans and truck bodies; Federal Signal, a designer and manufacturer of products and total solutions that serve municipal, governmental, industrial, and institutional customers; and VT Specialized Vehicles, a manufacturer of specialized truck bodies and trailers.

Electronics Industry Unplugged

Of all the industries impacted by a spreading economic malaise, the high-tech and electronics industry has the potential to be hit the hardest, especially as consumers spend less on expensive and luxury items. A recent industry group survey canvassing the market indicates that shippers and service providers are generally optimistic about their industry, yet wary of areas that need improvement.

Survey respondents—including executives from Philips, Tyco Electronics, Cisco, DHL, Maersk, and NYK Logistics—are generally pleased with their companies’ outlook, with 86 percent of shippers and 95 percent of service providers ranking their performance as “good” or “excellent.”

Surprisingly, 21 percent of all companies report that the high-tech and electronics industry is faring better than other sectors, while 61 percent believe that it has fared the same as other industries.

When it comes to supply chain improvements, cost is the first item on most executives’ minds. In a tight economy with fluctuating fuel prices, making supply chains as lean and cost-effective as possible is a recurring concern for both shippers and solution providers.

For shippers in particular, fuel prices represent the largest portion of cost increases at 40 percent, followed by lack of synchronization (33 percent), and lead-time variability (13 percent).

Survey respondents were equally candid about areas that need improvement. Issues that shippers cite as having the worst effect on their supply chains are higher carrier prices (80 percent), lack of visibility (67 percent), data integration and synchronization (53 percent), and new product introductions (20 percent).

By contrast, service providers report lack of visibility (78 percent), data integration/synchronization (77 percent), lack of collaboration with partners and higher carrier prices (both 59 percent), and tight capacity (54 percent) as outstanding concerns with the worst potential impact.