Over the past decade, many companies have taken the plunge to extend their supply chains to China and other foreign countries. With wages there so low and with the costs of multi-modal (e.g. ocean/truck/rail) shipping being cost effective, large numbers of manufacturers and distributors have moved their production and sourcing overseas. At the same time, many companies have begun selling into these markets to increase sales and profits.

There are four variables that may trigger a recalibration of the percentage split between global and national supply chain utilization. First, there are signs that high Chinese logistics costs are expected to rise further. Some 85% of delegates at this year’s Automotive Logistics China conference, representing vehicle manufacturers, suppliers and logistics providers, say they expect the real price of logistics in China to rise over the next five years. Chinese logistics costs are already high at 18.5% of GDP, nearly double that of more developed markets.

The second variable is fuel prices. Bunker fuel has gone up 85% since the beginning of this year. With fuel costs expected to rise to $150 to $200 a barrel in the coming months and years, this will drive up the costs of ocean, air, rail and truck freight shipping, making long, global supply chains much more costly. The demand for crude oil seems insatiable. The market penetration of highly fuel efficient engines and the market utilization of alternate fuel sources appear to be moving at a snail’s pace. It will take decades before we move away diesel fuel powered trucks and trains.

The third variable is the world’s food supply. The world reserves of wheat, rice and other staples are at 35 year lows. The U.S. government gives farmers a 51 cent per gallon subsidy to divert corn from the food and feed grain supply. The United States produces roughly 6.5 billion gallons of ethanol annually, representing less than 5% of gasoline supplies. Under the new guideline, this is projected to make up more than 25% of the gasoline mix.

When farmers produce more corn, they produce less of everything else. More corn means less wheat. Less wheat means shortages and higher costs for bread and pizza. It also results in shortages of other staples such as eggs, poultry and milk. Critics argue that corn-based ethanol is also energy inefficient and consumes scarce water resources.

The push to convert food products to biofuel is likely going to slow down or come to a crushing halt. Are we going to starve the citizens of the world just so we produce more alternate fuels? Does it make sense to provide subsidies to “put the world’s dinner into the gas tank?” As we change course and use more of these food substances for human consumption, this will place more upward pressure on the cost of diesel fuel, making long supply chains even more costly.

The fourth variable is the ever declining value of the U.S. dollar. As the currency declines, it makes the cost of importing foreign goods that much more expensive. The U.S. may have to go through a couple more difficult years economically to overcome its current housing and credit crises. This may place more downward pressure on the embattled greenback making it even more costly to import goods from overseas. While some argue that the U.S. will likely soon pull out of their current malaise as a new President takes office, this is debatable. The problems associated with the housing and mortgage crisis and the level of household debt may make a recovery a long and arduous process.

There is a great attraction in establishing a global supply chain. Jim Tompkins, President & CEO of Tompkins Associates, the keynote speaker at this year’s Supply Chain & Logistics Association Canada Conference highlighted that companies with global supply chains are more profitable than companies with exclusively North American supply chains. Companies that both import from and export to overseas markets, are even more profitable than companies that do not export abroad. The global shipping and logistics movement is here to stay.

However, with overseas logistics costs and shipping costs rising so significantly, this may cause some supply chain professionals to do some rethinking and recosting exercises? As Mr. Tompkins pointed out, the typical transit time from China to North America is 23 days. Goods shipped from a North American vendor can be transported in a fraction of the time, resulting in more inventory turns and improved cash flow.

The key question is how much of an increase would it take in the landed cost of importing goods from some of your offshore suppliers before it becomes more cost effective to produce and distribute the goods in North America? You can do the math by creating a model that reflects changes in production and distribution costs based on projected cost increases (offset by any improvements in productivity) and variances in inventory turns and cash flow by virtue of manufacturing in North America. This may help you determine when and where a “Made in North America” supply chain as compared to a global supply chain works better for your company’s various product lines.

Taken together, these four elements place considerable upward pressure on the costs of long supply chains. In time, they may cause many countries and companies to look inward, to recalibrate the balance between global and national or North American sourcing, production and distribution, increasing speed to market and cash flow while reducing the distances that goods must travel and as a by-product, reducing fuel consumption and freight costs.

Over the past twelve months, there has been much discussion of the economic problems currently being faced in the United States and to a lesser extent in Canada. The rising cost of fuel, food shortages, sub-prime mortgages, the downturn in the housing and automotive sectors and the credit crunch have all made front page news. As we come out of this economic recession and “freight recession”, we will be facing a new set of challenges. Here is what is happening.

Trucking company failures accelerated in the first quarter in the United States to their highest level since the 2001 recession. According to Donald Boughton of Avondale Partners, trucking company failures rose to 955, up from 595 in the fourth quarter of 2007 and 385 in the third quarter. Boughton commented that “fuel is driving this again”. These 935 carriers, that left the industry either through bankruptcy or going out of business, operated 42,000 power units, or 2% of the nation’s 2 million class 8 tractors according to American Trucking Association statistics.

Boughton commented that “shippers pushed back on fuel surcharges during the first quarter of this year. Carriers were so desperate for loads they would give in on fuel surcharges”. Two other leading stock analysts, Jason Seidl of Credit Suisse and Thom Albrecht of Stephens Inc., expect a continuing decline in truckload capacity through the end of the year.

Those carriers that are still in business are trimming their truck fleets. Truckload carriers are cutting capacity at the highest rate in a decade to create a better balance between supply and demand. Bob Costello, chief economist of the American Trucking Association has supplied data that showed a 3.6% drop in capacity in January and February, “the largest since we began collecting the data”. J.B. Hunt Transport Services, the largest publicly traded truckload carrier and Werner Enterprises, both said they made year-over-year cuts of 9%. Dan Einwechter, CEO of Challenger Motor Freight, one of Canada’s largest truckload operators commented this week at the SCL Conference in Toronto that he has trimmed his fleet by about 4%. As truck fleets are being reduced, fewer drivers are being hired.

While trucks are being removed due to bankruptcies and fleet size reductions, truck production and truck purchases are also being scaled back dramatically. Steve Russell, CEO of Celadon Inc. commented at Truck World two weeks ago the truck production is being reduced from a norm of 250,000 units annually to a forecast of 120,000 trucks this year. As an example, OEM’s sold 10,419 big trucks in the United States in March 2008 as compared to 16,090 in March 2007. Quarterly sales fell to 30,248 from 51,116 last year.

One interesting component of the truck capacity situation is the used truck market. An unprecedented wave of demand for used trucks, mostly from Russia, is driving supplies of two and three year old trucks overseas. This is taking even more capacity out of the market.

While capacity is shrinking, demand is on the way up. In February, truck tonnage as reported by the ATA showed an increase for the fourth straight month. Several industry analysts are taking this as a signal that there are better times ahead. Thom Albrecht noted that increases in freight volumes can be a leading indicator of an upturn in the economy.

However other indices, notably the latest manufacturing index from the Institute of Supply Management showed a continued weakness, particularly for auto and home sales and for factory and durable goods ordered. We may not be “out of the woods” just yet. The good news is that there were 2.9 million more loads available on Transcore’s load board than were posted on their load board in the same quarter of 2007.

We may be near bottom. “Perhaps we are seeing a repeat of the last recovery,” said Bob Costello. Costello said the association’s tonnage index began to rise eight months before the end of last recession that occurred in 2001. If that pattern is followed this year, U.S. economic activity would turn positive in June.

So what does this all mean to shippers? As demand increases, there will be a lot less truck supply than at the start of this freight recession. While some parked trucks will be put back into service, it will take time to ramp up truck production, hire and train drivers and replace the trucking companies that have gone to “trucking company heaven”.

This will certainly drive up rates. Commenting at this week’s SCL conference, Einwechter predicted that truckload rates will increase by 10% over the next year. Some of the larger shippers can see this coming. Wal-Mart recently concluded a two year arrangement with its carriers while Target Stores has signed a three year deal. Smart shippers should now be locking up capacity and firming up rates with their quality core carriers to ensure they will be able to meet the demand in better times. This is also a wise strategy to buffer your company from “rate shocks” that will come into play as supply and demand begin to move in different directions.

The entire transportation industry and shipper community is faced with one of the major challenges of our time, how to cope with the ever increasing cost of fuel and with global warming. There is no quick fix or easy answer. Let’s take a look at some of the initiatives under way.

Fuel Surcharges Help but they are not the Solution

While fuel surcharges may or may not cover the cost of fuel, they are by no means a solution to the problem. The fact is that ever increasing fuel costs and fuel surcharges raise the cost of goods and services and are an inflationary force in our economy. If a transport company cannot cover its fuel costs, this jeopardizes the viability of the enterprise. As companies fail, less truck capacity will ultimately mean higher freight costs. If fuel surcharge costs are accepted by shippers, they are ultimately passed on to consumers in the form of higher cots at the retail level..

Speed Limiters being introduced in Canada

The Canada Safety Council supports a proposal to mandate speed limiters on trucks set to a maximum speed of 105 km/h. A speed limiter, sometimes called a governor, is a built-in microchip that allows a truck engine’s top speed to be preset. Trucks built in the last decade come equipped with this technology. Nonetheless, regulation would ensure all trucks operate at a safe speed. That would reduce highway collisions related to tailgating and improper lane changes. In addition there are major environmental advantages. The measure will conserve fuel and help Canada meet its commitments under the Kyoto Accord.
In November 2005, the Ontario Trucking Association asked the provincial government to require all trucks that operate into, out of and within Ontario to activate the speed limiters and to set the highest speed a truck can go to no more than 105 km/h. The environmental, safety and economic benefits of mandating the activation of speed limiters at a maximum speed of 105 km/h include:

• Fuel savings of up to 10,500 litres of diesel fuel per year for a typical tractor-trailer unit — or 50 million litres in total for all such trucks in Ontario. At today’s diesel prices, this would equate to annual savings of about $ 8,400 per truck.*
• A reduction of as much as140 kilo tonnes of greenhouse gas emissions per year.*
• Less severe car-truck crashes.
• Improved tire and brake wear.

Bill 41, the Ontario law mandating the use of speed limiters passed another legislative hurdle on May 16 when it received approval in principle from the Ontario Legislature. All three parties supported the Bill. Given the fact that the Liberals have a majority government, it is unlikely that the bill will be significantly altered at this stage of the game. It will next go to a legislative committee for consideration then likely return to the Legislature for final passage before the Legislature adjourns for the summer at the end of June.

The government then intends to develop the necessary regulations over the summer and have the law ready for implementation in 2009. There will likely be a period of educational enforcement early in the year with full enforcement by the fall of 2009.

The USA moving in a similar direction

With an eye on the environment and a more sustainable future, the American Trucking Associations recently announced several initiatives that it said will help to reduce fuel consumption and CO2 emissions, as well as help to thwart global climate change. Dubbed “Trucks Deliver a Cleaner Tomorrow,” ATA President and CEO Bill Graves said in a statement that this endeavor can reduce fuel consumption by 86 million gallons and CO2 emissions by 900 million tons for all vehicles over the next ten years.

In a report drafted by the ATA Sustainability Task Force, which is led by Tommy Hodges, ATA Vice Chairman and Chairman of Titan Transfer Inc. the following six core recommendations of “Trucks Deliver a Cleaner Tomorrow” were presented:

a) Set governors on new trucks to limit speeds to no more than 68 mph and reduce the national speed limit to 65 mph for all vehicles;
b) Reduce engine idling;
c) Increase fuel efficiency by encouraging participation in the U.S. EPA SmartWay Transport Partnership Program;
d) Reduce congestion by improving highways, if necessary by raising the fuels tax;
e) Use more productive truck combinations; and
f) Support national fuel economy standards for trucks.

Two large American trucking companies have taken proactive steps recently to reduce fuel consumption and reduce CO2 emissions. In March, Con-way said its LTL subsidiary Con-way Freight turned back the speed governors on its 8,400-tractor fleet from 65 to 62 miles per hour. And last week it announced that Con-way Truckload has turned back speed governors on its 2,700-tractor fleet from 70 to 65 miles per hour. Meanwhile, Schneider National said last week its fleet of more than 10,600 drivers will reduce truck speed to 60 mph, resulting in a savings of more than 3.75 million gallons of diesel fuel and reducing CO2 emissions by 83.25 million pounds, annually.

It’s Time to Revisit Larger Trucks

The American Transportation Research institute has concluded in a new study that the use of heavier trucks can be an effective way for the industry to reduce fuel consumption and emissions. “The estimated fuel efficiency improvements found in this study translate directly into equivalent percentage improvements . . . of CO2 emitted”.

“As we look for ways to reduce congestion and greenhouse gas emissions, without sacrificing the supply chain efficiencies that the trucking industry supports, higher productivity vehicles should be part of an overarching solution,” said Doug Duncan, president of FedEx Freight and ATRI chairman. With larger trucks, proponents claim, carriers could reduce their overall fleet size by shipping more freight with less equipment, which in turn is easier on the environment and highway infrastructure.

A coalition of about 30 trucking carriers, shippers, and manufacturers was in Washington in an attempt to convince Congress to adopt several demonstration pilot projects involving larger trucks in select U.S. states. The plan could be written into an upcoming congressional highway reauthorization bill. The current highway bill is scheduled to expire in September of 2009. Americans for Safe and Efficient Transportation -- which includes several state trucking associations -- is targeting Maine, Minnesota, Wisconsin, South Carolina and Georgia to experiment with larger, heavier trucks. Texas also remains a strong possibility to be added. Various union and lobby groups continue to oppose this initiative. They argue that heavier trucks will cause more damage to roads and bridges and pose a safety hazard.

Research and Produce Alternate Efficient Fuel Sources

Certainly the production of alternate fuels is another answer to the problem. The current food shortage (produced in part by the diversion of corn production from the food supply to energy production) and the inefficiency of ethanol as a crude oil substitute raise issues about the viability of at least this option. We are years away from having electricity powered cars and trucks to replace the current gasoline and diesel fueled engines. Nevertheless, there is an urgency to continue to perform R & D and tests of crude oil substitutes.

Hybrid Trucks begin to Gain Acceptance

UPS has ordered 200 hybrid electric vehicles (HEVs) and 300 Compressed Natural Gas (CNG) vehicles for its U.S. delivery fleet. No financial details were disclosed.

The purchase means the UPS alternative fuel fleet -- said to be the largest such private fleet in the United States -- will grow 30 percent from to 2,218 low-carbon vehicles. "Alternative fuel research and development is just one of the ways that UPS is mitigating climate change risks," said Bob Stoffel, UPS's corporate sustainability officer. "We also are focused on aggressive conservation programs and improving network efficiency to cut fuel use."

The new HEVs will next year join 50 of the same type delivery trucks already in operation and are expected to save 176,000 gallons of fuel annually and reduce CO2 emissions by 1,786 metric tons each year, which UPS said is equivalent to removing almost 100 conventional UPS trucks from the road for a year.

The 300 CNG vehicles will be deployed later this year and join more than 800 such vehicles already in use in the United States. These vehicles, which run on natural gas, are expected to yield a 20 percent reduction in emissions over the cleanest diesel engines available today. While these vehicles represent a small percentage of the vehicles in the UPS fleet, this is certainly a positive move.

Will a Carbon Tax fly?

The province of British Columbia has taken the bold step of introducing a carbon tax. Stéphane Dion, the leader of the Federal Liberal Party in Canada is contemplating making a federally mandated carbon tax a centerpiece of his election plan. While the details of this plan have yet to be introduced, it has already been met with negative press (e.g. “suicidal at the polls,” and “unerring instinct for his own jugular”). The fact is that this policy enjoys popular support from 61 percent of Canadians. The tax will likely penalize the consumption of greenhouse gases. However, coupling this tax with incentives to buy hybrid and fuel efficient cars and reductions in income taxes may be saleable to the Canadian electorate.

Clearly we have a long way to go to bring the monster of rapidly rising fuel costs and global warming under control. But we have to start somewhere. Encouraging energy conservation, providing incentives for the purchase of hybrid vehicles, creating greater incentives for research and development and implementation of alternate fuels (that do not reduce the availability of food supplies), allowing heavier trucks on North America’s roads and a federally mandated carbon tax in the United States and Canada may collectively be steps in the right direction.

For many companies, freight costs represent one of their five largest expense items. Unfortunately, many executives view freight costs as a fixed cost, a necessary evil and do not take advantage of the many opportunities available to achieve savings. While freight bids have become one of the most popular methods of achieving cost savings, here are some other options to consider.

Packaging

Wal-Mart has launched a major offensive, under the guise of a “green” initiative, to reduce the costs they incur in paying for freight by challenging their vendors to develop more cost effective packing. They are clearly on to something. There are consulting companies that specialize in this field. They will come in to your company, analyze the packaging of your products and develop methods of removing air from your consumer packaged goods. If you calculate the cost of adding one or two more pallets of freight to a truckload shipment, the annual cost savings can be enormous.

Loading

Since you are paying for space occupied on a trailer or container, there are situations where new loading processes or changing pallet dimensions can replace the “air pockets” in a trailer with more freight. In some industries, this represents a significant cost savings opportunity.

Customer Order Sizes

There are situations when a customer order does not fill a trailer or boxcar. Some customers can be convinced to take additional freight to fill out the space available. This will produce additional revenue and reduce your freight costs as a percent of revenue.

Establishing Best Practices

Many accessorial charges imposed by carriers are a direct result of poor freight handling processes. Some companies do not have driver appointment times. This may cause loading or unloading delays as trucking companies line up to make their pick-ups or deliveries. Poor planning can lead to trailer detention, another popular accessorial charge. Creating and maintaining best practices can eliminate some of these unnecessary costs.

Modal Choices

There can be big cost savings in switching from expedited freight to standard ground, from small parcel to LTL, from LTL to truckload, and from road to rail. While these changes may not be acceptable to customers in all instances, it is at least worthwhile having a dialogue with your customers and with production to see if earlier order notification, a change in production scheduling coupled with a switch in modal choice can save you and your customer some money. You will never know unless you ask. Since your customers are probably looking for cost savings as well, these types of decisions may improve your company’s competitive position.

Take advantage of Consolidation and Polling Opportunities

Have you looked into consolidating freight and shipping to certain geographical areas on designated days, moving freight to “pool” points where the freight can be disaggregated and shipped to customers in larger more cost effective lot sizes? Have you looked at combining supply chains and taking advantage of the higher shipping volumes to specific locations? Have you thought about combining your freight with your sister companies or even competitors to increase shipment sizes?

There are a multitude of cost savings opportunities out there for enterprising shippers that are willing to challenge the status quo and try some new freight handling processes.