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The 21st Century Supply Chain - A Study in Complexity

By Clifford F. Lynch

Eye-For-Transport, August, 2005

Supply chain management, contrary to popular opinion, is not a new concept. Almost fifty years ago, Jay. W. Forrester, in an article published by the Harvard Business Review, suggested that the success of an industrial firm depends on the "interactions between the flows of information, materials, money, manpower, and capital equipment".

In recent years however, supply chain management has received new and intense emphasis. In 2004, the Council of Logistics Management changed its name to the Council of Supply Chain Management Professionals; and increasingly, firms are attempting to understand and apply modern supply chain management techniques to their businesses. It has not been easy during the past two years.

One of the major challenges has been the shortage of transportation capacity and the resulting increases in cost. Since the summer of 2003, shippers and receivers have experienced continuing increases in freight rates, and at the same time have been faced with rising fuel costs, insurance rate increases, and both equipment and driver shortages.

These factors have resulted in higher rates for shippers; and when combined with the consolidation that has taken place in the industry, also have created a significant shortage in transportation capacity.

Carriers have been more selective in the freight they have handled, and have turned business away they view to be unprofitable.

These problems have been compounded further by port congestion and record imports, particularly from China. Cargo originating on the Pacific Rim is expected to increase by 10 to 12% over last year, further exacerbating an already serious situation.

And, if that were not enough, the new container ships are too large for the Panama Canal, and if they call on U.S. ports, must by necessity, move through the Suez Canal to eastern ports, at least until the canal is enlarged. For example, on July 16, the Gudrun Maersk, the world’s largest container vessel, called at the port of Yantian, China. The berthing of this ship, 1204 feet long and 140 feet wide, with a draft of 49 feet, was a record for Chinese ports. Don’t look for it in Houston anytime soon. The Panama Canal maximum ship dimensions are a length of 951 feet, a width of 106 feet, and a draft of 39 feet.

Even though the eastern ports are getting ready (two super post-Panamax cranes recently arrived at the port of Savannah), this shifting of the port base to the east will have implications for distribution center locations and shipping patterns.

Railroads have been operating at near capacity due to increased international movements, as well as traffic diverted from the highways. According to the Association of American Railroads, intermodal shipments reached record volumes throughout much of 2004. A record breaking 2 million carloads and 13 million intermodal units moved over U.S. and Canadian railroads.

The Federal Highway Administration anticipates that freight volumes will grow by 70% by 2020. The value of goods moved is estimated to grow to $30 in 2020 (compared to $9 million in 1998); and as a result, truck miles are projected to nearly double. At the same time, the American Trucking Association projects a shortage of 111,000 drivers by 2014. Already, according to the ATA, the industry has a current shortfall of 20,000 drivers.

(This current number is disputed by some, but almost everyone is in agreement that there will be a long-term shortage.)

Although Class 8 truck orders are up significantly, there is the major question of who will drive them. And, if these orders simply reflect replacement equipment, they will not add capacity.

The short-term outlook therefore, is not good. While truckload capacity is improving over 2004, demand still exceeds capacity. The average Teamster is 57 years old, and there is no pool of younger employees anxious to take his or her place. Oil prices are at an all-time high. Line-haul rates and accessorial charges no doubt will continue to rise, and capacity will be an ongoing concern. Since transportation costs constitute almost 63% of total logistics expenditures, this is no small problem. It will take all the supply chain resources and intellect we can muster to offset these increases.

Another significant challenge will be the understanding and management of the global supply chain. For years, many logistics managers have preached the onset of globalization. However, not so many have really prepared for it and find themselves a little short on the front end of the equation, "practice what you preach."

According to the U.S. Chamber of Commerce, U.S. international trade in goods and services has grown from 10.7% of GDP in 1970 to 26.9%. NAFTA trade grew from 26% of total U.S. trade in 1990 to almost 33% by the end of the decade. Today, international trade totals over $2.0 trillion. By 2006, 58% of North American manufacturers will begin, or increase, sourcing from China. Sixty percent already do. Wal-Mart alone, purchased $15 billion worth of Chinese products in 2003.

Supply chains are getting stretched and an increasing number of firms are placing new emphasis on truly global relationships. A survey by the Foundation for the Malcolm Baldrige Quality Award revealed that 95% of CEO respondents identified more globalization as their top challenge over the next 3 to 5 years. Eighty percent identified improving the importance of global supply chains as their top challenge. Needless to say, CEO challenges quickly become the personal challenges of everyone in the organization and will most certainly impact the logistics and supply chain managers. A new way of looking at some of the basic functions will be necessary in order to remain competitive.

There will be a push for better technology. The complexity of global logistics will raise the bar where technology is concerned. Shippers charged with overseeing duty management, compliance screening, landed cost calculations, customs clearance, and document filing will require systems far more sophisticated than the warehouse and transportation management systems they currently use for domestic activities.

Education will be a "must have," not a "nice to have." It is estimated that less than half of the logistics executives currently have global responsibilities. And it is hard to imagine

That anyone out there could be fully conversant with all of the complexities of managing all the aspects of global trade. Education will be a necessity. Given that U.S. Customs regulations for import shipments alone, run well over 500 pages, it is clear the training process won’t be quick or easy. But it will be necessary. It is the price of living – and thriving – in a global market.

Hopefully the lessons of 9/11 are still fresh in our minds; but in case they are not, the recent bombings in Spain, the UK and Egypt were stark reminders. While the Spain and UK explosions involved passenger transportation, they have shifted U. S. concern away from aviation to our railroads. Hopefully, the governmental attention will include freight transportation, as well. Whether it does or not, however, any responsible supply chain manager should be looking at ways to secure his or her cargo.

Finally, we must learn to collaborate better. According to Dr. Donald J. Bowersox, of Michigan State University, the word "collaborate" may be the most popular word of the twenty first century. Hopefully, its successful execution will be the most popular technique of the twenty first century. Managing the supply chain calls for much more than technical skills. It also requires expertise in collaboration, cooperation and relationship building; mastery of the arts of negotiation and persuasion; and most important of all, sensitivity to others both within and outside one’s own firm.

Collaboration will be the glue that holds this fragile supply chain together.

 

 

 

 

 

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