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
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
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
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
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.