Trends-July 2006

Global supply chains are becoming longer, deeper, and more connected, but as the past five years have proven, they are also more vulnerable to disruptions that threaten the fluidity of foreign trade.

The challenge for global shippers is to create a cross-enterprise blueprint that incorporates security and contingency planning as core business practices, said economist Rosalyn Wilson at the 17th Annual State of Logistics Report presentation in June. The yearly study, sponsored by the Council of Supply Chain Management Professionals, benchmarks logistics trends.

Dovetailing with last year’s challenge to make security compliance a priority, Wilson’s 2006 commentary addressed the strategic approach U.S. businesses must take to build a secure and efficient supply chain, and the leadership required to make this vision a reality.

“The best approach for firms faced with pervasive risk is to adopt a framework that manages security as a core business function, and integrates security prerogatives across all activities of the enterprise,” she reported.

Ensuring that the U.S. cargo transportation network remains viable is paramount. Aside from obvious security implications, archaic transportation infrastructure exacerbates existing capacity constraints at ports and on U.S. highways and railroads.

“It is no longer a question of ‘if’ we will reach a crisis point, but ‘when,'” said Wilson, who sees security compliance as a common ground for industry and government to come together and create mutually beneficial solutions.

“We need strong national leadership to focus on solving the tough capacity problems facing our transportation network. Embracing security as a core business function will enable firms to gain measurable bottom-line benefits while mitigating the need for a plethora of invasive government practices,” she concluded.

2005 IN REVIEW

Overall, 2005 proved to be a watershed year for the U.S. logistics industry as it experienced unprecedented growth despite one of the most destructive hurricanes in U.S. history.

Business logistics costs amounted to $1,183 billion, or 9.5 percent of the Gross Domestic Product. This represented a jump of $156 billion or 15.2 percent growth over 2004, the largest total in the report’s history.

Tight capacity and strong demand enabled truck carriers to raise rates, but Hurricane Katrina’s impact on fuel production and distribution, coupled with driver pay increases and insurance costs, marginalized profits. As a result, 2005 transportation costs rose 14.1 percent.

Inventory carrying costs increased 17 percent during the same period, while warehousing capacity continued to shrink—with vacancy rates dropping to 7.3 percent, versus 9.7 percent in 2004.

Both figures suggest businesses are eschewing lean strategies for safety stock to counter unforeseeable demand or supply chain disruptions.

Wilson also looked at 2005 trends by mode. Among her findings:

• Trucking costs increased by $74 billion compared to 2004.
• Demand for trucking services was strong, and tight capacity enabled trucking companies to raise rates. Costs rose faster than rates, however, eroding some of the gain.
• The driver shortage worsened substantially in 2005. As the economy flourished, the availability of drivers became a limiting factor in the quest to add capacity.
• Maritime and domestic water traffic increased by $2 billion for 2005, bolstered by a surge in ocean freight.
• More ships with greater capacity were expected to push rates down, however port capacity and throughput constraints have offset any changes in pricing.

Rail/Intermodal

• Rail freight costs jumped 14.3 percent, with revenues for Class I railroads up 13.8 percent.
• High demand has kept the railroad industry operating at near capacity. To meet the surging demand for services, U.S. freight railroads expect to hire 80,000 new workers by 2012.
• Air freight grew by $6 billion during 2005, an increase of 17.6 percent.
• Despite revenue growth, the industry’s fuel bill rose to $91 billion and is forecast to grow to more than $110 billion in 2006.

Congress and AAR Haggle Over Hazmat

When a Norfolk Southern freight train struck a parked train at a crossing in Graniteville, S.C., this past June, it killed eight people and released a toxic vapor of chlorine gas. The accident brought home a reality that government and industry authorities have wrangled over for some time—safe transport of hazmat cargo on U.S. roads and rail.

Calling the current environment for rail transportation of hazardous materials “untenable,” the nation’s railroads asked Congress to either provide the industry with liability limits, or eliminate its government mandate to carry hazmat substances.

“Railroads should be permitted to decide for themselves whether to accept, and at what price they are willing to accept, such materials for transportation,” said Edward R. Hamberger, president and CEO of the Association of American Railroads (AAR) during recent testimony before the House Transportation and Infrastructure Committee’s Railroad Subcommittee.

If railroads gain the ability to dictate what they can or cannot carry, U.S. highways would carry not only more hazardous materials, but also more highly hazardous shipments. During the hearing, lawmakers raised similar concerns about whether hazmat shipments transported via railroads should be rerouted around densely populated areas, and if so, who would have the authority to issue such a directive.

Empowering local municipalities to reroute hazardous materials would exacerbate existing safety concerns, according to House Railroad Subcommittee Chairman Steven LaTourette (R-Ohio).

“The rail system is not as extensive as our highway system, and diverting a train from one urban area would just as likely send it through a number of other urban areas,” said LaTourette.

In some cases, hazmat trains would be forced to use lesser quality tracks through more difficult terrain, he added.

“Rerouting would create additional congestion on a national rail system already strained for capacity,” he testified. “In the end, the disruption caused by rerouting trains might force more hazardous cargo onto our highway system—a result in no one’s best interest.”

Other officials insisted that the railroad industry take a more detailed look at ways it can improve operational protocol and tank car equipment before it offloads responsibility and liability on the trucking industry.

The AAR and the Freight Railroad Administration are looking at developing new tank car equipment that would reduce the risk of a rupture by more than 50 percent. But while these initiatives are a step in the right direction, the real issue at hand is accident prevention.

Because it will take some time to design and construct improved tank cars, railroads should first look to implement operational measures that will minimize the vulnerability of tank cars transporting hazmat products, noted Robert Chipkevich, director of the National Transportation Safety Board’s Office of Railroad, Pipeline, and Hazardous Materials Investigations.

“We are concerned that our rail partners’ proposals are driving us down the wrong track regarding hazmat transportation safety,” agreed Marty Durbin, managing director, federal affairs, The American Chemistry Council.

One thing remains clear to LaTourette. “We will all benefit from keeping hazardous cargo off the road and on a safe, efficient rail system,” he concluded.