Retailers that survived the Great Recession through unprecedented, at times desperate, cost-cutting are transitioning from their slash-and-burn mentality to one of growth and prosperity next year and beyond.
“As we exit 2010, retailers are cautiously optimistic, and are preparing for growth opportunities,” Casey Chroust, executive vice president of retail operations at the Retail Industry Leaders Association, said at a teleconference Oct. 19.
RILA and the Auburn University College of Business used the occasion to discuss the findings in the university’s 2010 transportation study, “The State of the Retail Supply Chain,” in which more than 175 retailers were queried about their issues and strategies.
Supply chain professionals in 2009 slashed transportation costs, safeguarding their industry from economic meltdown. They rationalized inventories to reduce inventory-carrying costs and streamlined the flow of goods from overseas factories to distribution centers and onto the store shelves. “They saved billions of dollars across the industry,” Chroust said.
With ultra-lean operations in place, those same logistics professionals are being asked to secure vessel and inland transportation capacity and equipment and to stabilize freight rates in an environment where carriers have the upper hand.
“We’re seeing some saber-rattling by carriers about raising rates because there is not enough capacity,” said Brian Gibson, professor of supply chain management at Auburn University and chief author of the study.
Shifting to a growth strategy will be especially difficult because the industry is in a state of flux. Retail sales, though higher than in 2009, are inconsistent. Unemployment rates are lingering in the mid-9 percent range, high by historical standards. And projecting the level and duration of the economic recovery is a major challenge. “Supply chain professionals have to play economic forecaster,” Chroust said.
And yet cargo volumes are robust, rising 10 to 15 percent over last year. The initial strength of the trade recovery took shippers and carriers by surprise early this year, straining capacity on sea and on land, and ratcheting up freight rates. The spot rate for shipping a 40-foot container from Hong Kong to Los Angeles on Oct. 18 was $2,300, 2 ½ times the $871 rate in August 2009, according to the Drewry Container Benchmark, a rate indicator started in 2005 by London-based Drewry Shipping Consultants.
With trade recovering, supply chain strategists are changing their focus. In the 2009 Auburn University study, slashing supply chain costs was far and away the driving strategy. Today, infrastructure capacity, vessel and truck capacity and equipment availability are the top concerns.
In short, shippers are putting more emphasis on service and getting the most bang for their transportation buck. The painful lessons of last winter — when tight capacity led to shipment delays and lost sales — are fresh. “We can’t get caught flat-footed if port capacity or equipment availability falls short,” Gibson said.
In this respect, the transportation industry mirrors retailers’ experience: Expansion was put on hold. For retailers, new stores were delayed. For the transportation industry, infrastructure development ground to a halt, carriers delayed ship and truck purchases, manufacturing of marine and domestic containers stopped, and ocean carriers reduced effective vessel capacity by 10 to 15 percent through a new strategy known as slow-steaming.
With cargo volumes growing again, the concerns of several years ago about insufficient infrastructure capacity have resurfaced. Infrastructure limitations were “back to the forefront” in the 2010 study because precious little infrastructure was developed over the past year-and-a-half, Gibson said.
Keeping transportation costs low is still a requirement, but supply chain professionals were so successful last year that there are few opportunities left for cutting costs, Gibson said. In the current growth environment, these professionals are being asked to hold onto their gains while improving customer service. Balancing these objectives can result in “incongruent goals,” according to the study.
For example, customers want continuous product availability at the stores, but retailers still have a mentality of rigorous inventory control. High-frequency deliveries from warehouses to stores may be warranted, while supply chain professionals are attempting to maximize the capacity utilization of trucks.
Balancing these objectives will have an impact on operations at distribution centers, Gibson said. Warehouse operators will be asked to prepare store-ready displays, increase the velocity of product flow from overseas factories to regional distribution centers and improve transit times from the distribution centers to the stores.
These requirements beg for greater visibility into the supply chain from origin to destination. Achieving visibility requires better collaboration among supply chain partners, Gibson said.
At the same time, increasing velocity shouldn’t be accompanied by significant cost increases. Greater efficiencies can be obtained when shippers work with carriers to eliminate deadhead miles and arrange cargo backhauls so motor carriers get two-way traffic. The strategy becomes, “You help us take cost out, and we’ll help you take cost out,” Gibson said.
Spending decisions in the coming year likely will focus on improving information systems, developing greater visibility into the supply chain and improving responsiveness to customer demands, according to the report.
Streamlining the supply chain also requires that retailers address their internal inconsistencies. Retailers today sell merchandise at their stores, online and through catalogs, but they treat each as separate supply chains. This prevents retailers from leveraging their cargo volumes to reduce operational costs and negotiate more favorable transportation rates.
A major challenge for retailers in the years ahead will involve integrating their multichannel supply chains to leverage their inventories and assets, according to the study. This may involve employing several distribution methods, including traditional distribution centers, direct-store deliveries and cross-docking. As freight volume grows, retailers must develop networks capable of moving large quantities of product with exceptional economies of scale, according to the report.
As retailers develop these networks, they must monitor long-term trends such as oil prices, which will certainly rise as global trade increases. Ocean carriers have addressed the fuel situation through slow-steaming, which exploded on the scene last year. With carriers realizing unexpectedly huge savings, shipping executives say slow-steaming is here to stay.
Retailers must factor into their supply chain strategies the increased transit times that occur as a result of slow-steaming.
Sustainability, or reducing pollution and carbon emissions from the supply chain, is another permanent trend. Most retailers have a sustainability policy they are extending throughout their supply chains. The primary goal of sustainability is to reduce diesel pollution and the carbon footprint, but retailers also should consider the business benefits inherent in these efforts, according to the study.
Therefore, reducing dead-head miles, installing solar power on warehouse roofs and replacing old fuel guzzlers with more efficient new trucks reduce operating costs while achieving environmental goals, the study noted.
The 2-year-old clean-trucks plans at the ports of Los Angeles and Long Beach provide an example of how retailers are working with motor carriers to reduce harmful emissions while improving efficiency in harbor drayage. The ambitious plan calls for an 80 percent reduction in truck pollution by Jan. 1, 2012, to be achieved by replacing old, inefficient, polluting trucks with modern 2007 model or younger trucks.
A number of RILA members met with their truckers to determine how much drayage costs would increase when the motor carriers replaced their old trucks with new ones costing about $100,000 each. The retailers agreed to pay higher drayage rates so owner-operators could afford the higher truck notes while still earning a profit. Today, more than 90 percent of the trucks in Los Angeles-Long Beach harbor comply with the emissions standards in the clean-trucks plans.
The Coalition for Responsible Transportation has participated in similar programs in Oakland, the Pacific Northwest and New York-New Jersey, Chroust said. The coalition is working with ports in the Southeast on a clean-trucks plan based on the Southern California model, he said.
Contact Bill Mongelluzzo at email@example.com.