Trends—January 2010

Trends—January 2010<br />

Guaging the Future of Marine Rail

Rail intermodal solutions have become an important component of the U.S. supply chain as capacity, cost, and sustainability concerns warrant more transportation flexibility. The hitch for shippers is the time it takes to re-handle cargo, switch modes, and turn assets and inventory. Rail intermodal requires better forecasts, greater visibility, and control of product farther upstream in the supply chain.

Combining the advantages of short-sea shipping and rail offers a seamless transition between modes, quicker turns, and less buffer inventory. But train ferries have yet to make the same impact in the United States as they have elsewhere around the world. Now that tide is turning—fast.

As the U.S railroad industry welcomes new interest from non-traditional shippers, some regional shortlines are making a play to introduce intermodal shippers to marine rail solutions. One example is Mobile, Ala.-based CG Railway, which has found a captive audience moving freight between the United States and Canada and Mexico’s industrial areas.

Operating two vessels, CG Railway offers sailings every four days from Coatzacoalcos, Mexico, to Mobile, ferrying as many as 115 standard railcars on its double decks.

Inbound Logistics recently tracked down Kevin Wild, senior vice president of CG Railway, to discuss the emergence of marine rail and how shippers are capitalizing on its value.

Q: Why aren’t there more marine rail services in the United States?

A: Marine rail service is a niche market. For international business, the operation can only run locations where the rail gauge is identical to the United States. This limits service providers and shippers to Mexico and Cuba. For U.S. domestic business, Jones Act regulations and imposed harbor fees put marine rail at a disadvantage compared to the pure land route.

Marine rail service may not be a solution in all situations, but can be effective in some areas. One key issue is spreading the word and making shippers aware of its advantages.

Q: What industries and cargo are best served by marine rail service?

A: Marine rail can carry bulk, packaged, and liquid shipments. It can handle any cargo in any type of railcar. Traditional volumes are well balanced between boxcars, hoppers, and tank cars and we have moved project cargo on flatbeds and double-stack containers in well cars.

Q: What are the advantages of shipping with a marine railroad?

A: The combination of rail and marine services presents an opportunity to help companies reach their "green" objectives. Fast transit and through billing allow us to compete against truck traffic, which helps reduce over-the-road congestion.

NAFTA trade is a large market and continues to grow. Our service provides an alternative route to traditional land crossings, opening another border between Mobile and Coatzacoalcos.

Marine rail shippers benefit from a consistent service that provides fast transit, efficient equipment use, and a continuous pipeline solution capable of meeting supply chain needs. The mode combination provides the ability to load a large volume of cargo, with no rehandling and close to just-in-time delivery.

Shippers have been able to reduce lead times, inventory levels, and private railcar fleets because the service provides a continuous flow of product. The faster transit results in three times more turns on equipment.

Q: How have other railroads received the service? How are you working with them to enhance it?

A: Target markets are east of the Mississippi River and Mexico City and in the South. Calling on the Port of Mobile provides direct interchange to five Class I railroads and the Alabama Gulf Coast Railroad. These rail interchanges offer complete coverage of the target markets.

Because the three Class I’s (Canadian National, Norfolk Southern, and CSX) do not go west of the Mississippi River, our interchanges are balanced. The railroads recognize that this alternative provides joint customers with unique advantages and they, too, are able to speed transit and improve equipment use.

Marine rail service allows companies to compete in markets that in the past were not reachable because of long transits, high inventory costs, and/or high freight rates. In more than a few situations, an industry located in the southeastern United States now has consistent monthly volume, which did not exist before, to a consignee in southern Mexico. The same is true for Mexican suppliers to U.S. customers.

Because we are a railroad and subscribe to car hire and interchange rules, and participate in the railroads’ interline settlement systems, the Class I’s, as well as our customers, follow the same guidelines as if the car were traveling via rail throughout the entire transportation move.

U.S. Roads: The Good, the Bad, and the Puddly

For Alaskan shippers, the road less traveled is a good thing. The 50th state ranks dead last in the Reason Foundation’s 18th Annual Highway Report, which scorecards state highway systems in 11 categories including congestion, pavement condition, fatalities, deficient bridges, and total spending. The study is based on information that each state reported for 2007.

While the Last Frontier has to battle Mother Nature’s caprice and sheer isolation, the U.S. Northeast has fewer excuses. New York, New Jersey, Rhode Island, and Massachusetts are among the worst-performing highway systems in the nation. California’s roads are also worse for the wear, ranking 48th among all states.

At the other end of the spectrum, the Great Plains states sweep the competition with seven of the best highway systems. Top-ranked North Dakota, which has had the best performing system each year since 2001, scored well by having the least interstate and rural mileage in poor condition and ranking first in maintenance spending. New Mexico, 27th in 2000, now ranks second in overall performance and cost-effectiveness. Kansas is third overall, followed by South Carolina and Montana.

"This year’s report shows the difficulties that many states face when making across-the-board progress in road conditions," says David Hartgen, lead author of the highway report and senior fellow at the Reason Foundation. "In many cases, we see two steps forward, one step back. We saw improvement in five key categories in 2007, but also found that more than 25 percent of the nation’s bridges are rated deficient. Urban interstate conditions are worsening again. And real progress in reducing urban congestion has slowed to a crawl."

5 Supply Chain Trends for ’10

Looking to the future, Brad Mitchell, president of distribution and logistics for UPS, offers advice for dealing with five developments on 2010’s horizon.

1. Security will be a top supply chain focus: Issues such as theft and counterfeiting are always on the radar for companies that manufacture high-value products and equipment, especially in a down economy. Businesses can expect security to be just as important in 2010, driven by continued economic challenges and factors such as globalization, which lengthens the supply chain and creates more opportunities for breaches.

Companies should ensure that they have full visibility across the supply chain to know where products are at all times and build in protective measures such as system redundancy and strategies for reducing hand-offs.

2. All "green" eyes will be watching Washington: Any doubts whether green supply chains matter will be wiped away in the coming year. Industry is preparing for a future where sustainability will rank high on government and consumer agendas.

Companies anticipate green legislation out of Washington in 2010, so now is the time to prepare. Supply chains play a significant role in the "greening" of a company. How companies get their products to market, and their decisions about whether to invest in/build infrastructure or leverage existing assets, can have a large impact on the environment.

3. Outsourcing will be in—in a new way: Companies across industry have long realized the benefits of divesting logistics functions, from supply chain design to warehousing and distribution. In 2009, more companies turned to outsourcing to free up working capital and focus on core capabilities that drive sales. Industries that have been slower to embrace the idea—notably healthcare—reached new levels of proficiency.

In 2010, expect outsourcing to be in as a key supply chain strategy to help companies increase flexibility while focusing internal resources on core business areas.

4. Doing more with less will continue as the new normal: Even as economic conditions improve, companies will continue to maintain the lower-cost structure they’ve put in place over the past 18 months as part of a focus on doing more with less.

At the same time, companies will be looking for new growth opportunities, which requires flexibility across the supply chain. Flexible supply chains that allow for business growth and low costs do not have to be an either/or choice. Companies can achieve both by taking advantage of external assets, such as multi-client distribution centers operated by third-party logistics providers, which allow them to share distribution space with others. By sharing facilities, companies don’t have to invest in storage space all year when they may only need full capacity during select months.

This is just one example of doing more with less. Others include adopting multi-modal transportation strategies to ensure that shippers have the right mode in place to get the right products to market efficiently and cost-effectively; and redesigning the supply chain to ensure the most effective sourcing and distribution strategies.

5. Companies will take a vested interest in vested outsourcing: Market experts have noted a new trend emerging where more companies are looking to structure relationships with suppliers based on a system of shared risks and rewards when executing supply chain services. In short, companies pay for outcomes rather than specific tasks.

Known as "vested outsourcing," this strategy is not appropriate for every third-party partnership, but when implemented under the right circumstances, it can result in a win-win proposition for both parties.

The key to making vested outsourcing relationships work is collaboration. It’s crucial that companies and their vendors, suppliers, and service providers work closely together to establish appropriate goals based on business objectives, then create realistic and measurable supply chain outcomes that will advance these goals.

Envisioning Zero Emission Tractors

In the latest green ground development, FedEx Freight is partnering with Vision Industries, Santa Monica, Calif., producers of the zero emission plug-in electric/hydrogen fuel cell hybrid Tyrano truck, to test drive a new tractor for its heavy-duty truck fleet.

The partnership comes as the public and private sectors look to reduce the number of short-haul diesel trucks on the road, particularly around congested cargo hubs. The Ports of Los Angeles and Long Beach’s Clean Truck Program, which offers incentives for replacing carbon emissions-spewing diesel trucks and keeping low-cost hydrogen close by and readily available, has given Vision’s quest a boost.

With FedEx Freight now in tow, widespread use of hydrogen/electric trucking fleets is imminent. The Tyrano heavy-duty Class 8 truck is 35 percent cheaper to operate than current diesel-powered trucks and 50 percent cheaper than liquefied natural gas. Its hydrogen/electric drive system has approximately 400 horsepower and 3,200 foot/pounds of torque, almost doubling the pulling power of a conventional diesel truck.

As part of the agreement with FedEx Freight, Vision Industries will configure a tractor with its hydrogen/electric hybrid drive train and test the vehicle over the next year in different operations to evaluate its operational sustainability.

Clorox Cleans Up

The Clorox Company is in spin cycle as it lightens its load. The Oakland, Calif., manufacturer recently announced that it would stop using chlorine gas in its signature bleach product because of growing concerns over the safety and oversight of transporting the product via rail.

Clorox will phase in a switch from chlorine gas to other chemicals in its bleach at its Fairfield, Calif., factory over the next six months and at other sites in coming years.

Chlorine shipments have come under scrutiny in recent years following fatal rail accidents where chlorine gas was released.

Clorox’s conversion also follows the U.S. House of Representative’s recent ratification of the Chemical and Water Security Act of 2009, which gives government greater latitude to force companies that use dangerous chemicals—often targets of terrorism—into considering safer alternatives.

Still, lobbyists for the chemical industry—notably DuPont and Dow—oppose the legislation, cautioning that government efforts to mandate chemicals used in manufacturing processes could lead to product shortages.

The Big Box Rebound

If import container volume is any indication, the U.S. retail industry and economy may be on the mend. After more than two and a half years of year-over-year declines, import cargo volume at the nation’s major retail container ports is expected to see three straight months of gains in early 2010, according to the monthly Port Tracker report by the National Retail Federation (NRF) and IHS Global Insight.

"We’ve been seeing hints of a turnaround in our past few reports, but this is starting to look like a clear trend," says Jonathan Gold, vice president for supply chain and customs policy, NRF. "If retailers are starting to import more merchandise, it’s because they expect to be able to sell more. That’s a good sign for our industry and the overall economy."

January 2010 is forecast at 1.02 million TEUs, down four percent from the previous year.

This figure would mark the 31st month of year-over-year declines, but NRF and IHS expect that trend to reverse in February, with container volumes reflecting a modest 16-percent increase over February 2009. March and April volumes are also tracking positively.

"The second half of 2009 has seen an improvement with ‘less bad’ year-over-year numbers compared to the first half," adds IHS Global Insight Economist Paul Bingham. "While improving, import container traffic is projected to be weak through March due to the traditional slow season combined with the weak pace of economic recovery."

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