Advantage: shippers

Advantage: shippers

Being a carrier is suddenly profitable again. Yellow Freight is the darling of Wall Street, ocean carriers are reporting superb earnings, and air cargo is up. Once more the talk turns to the ills that prosperity brings: congestion, rate increases and free-time reform.

Is this the high end of the boom-and-bust cycle of ocean slot capacity? Logistics decisions in 2004 were based on 2003's concepts of freely available slots and carriers fighting to "buy" the cargo. Shippers' carefully constructed computer models, built in a time of low demand, are hastily being updated to reflect today's supply shortages. Will the pendulum swing back in 2006 and beyond?

Not as fast as it has in the past, barring a consumer meltdown. Additional mega-ship capacity should be offset by longer dwell times in ports and congestion at gate chokepoints. More nimble ships may call at growing ports such as Mobile and Wilmington, Del., but growth will be offset by increased complexity of repositioning. It might even be-come profitable to make some goods in the U.S. again! Of course, all bets are off if a worst-case scenario is triggered by an attack on U.S. infrastructure.

The carriers are well aware that their recent prosperity has painted a target on their backs. Shippers, having eliminated their own logistics overhead, see no reason to pay for anyone else's in their supply chain. Company CFOs and trade associations paying billions of dollars in annual logistics processes see double-digit profits in their "partners" and wonder how to get even 1 percent back.

These numbers are very real to companies, and a lot of that overhead is perceived as being IT-related. Technology often seems ill-suited to logistics, whether the problem is in piecemeal implementation (as the vendors insist) or in the inherent problems of moving goods thousands of miles through bad weather, with broken equipment and human confusion. But Forrester Research estimates the average Fortune 500 company spends $370 million (3.8 percent of revenue) annually on IT, and - fairly or not - shippers are extrapolating those numbers to their suppliers.

Removing human and technology overhead is the impetus behind the latest industry buzzword - "3PL disintermediation." 3PLs and forwarders scoff at this notion, pointing with some justification at their twin pillars of value: trade complexity and technological investment. What company wants to depart from its core competencies to take on those headaches? Gary Ferrulli's cogent debunking of the Wal-Mart-APL rumor (Other Voices, Jan. 17) showed why the experience of Sea-Land with R.J. Reynolds and CSX Corp. would resonate with Wal-Mart, particularly because Wal-Mart's logistics department has extremely competent Sea-Land alumni.

But intermediaries can't breathe easily. Philip Abraham, the founding architect of Covisint and Vector SCM, has developed a "zero-party" logistics (ZPL) product that intends to destroy his previous creations. Why? "Traditional 3PL and 4PL processes hold shippers hostage to swings in traffic flows. Direct shipper-to-carrier processes allow faster adjustments."

Just as interesting is JPMorgan Chase buying Vastera despite its string of quarterly losses. Vastera might have turnaround prospects; a more likely explanation is the growing convergence of financial institutions with the trade mechanisms they have traditionally left to 3PLs. With Patriot Act and Sarbanes-Oxley responsibilities, banks are becoming concerned with (and liable for) the slapdash nature of international trade. JPMorgan Chase is, above all, buying knowledge to protect itself.

This need for protection heralds the commoditization, then disintermediation, of logistics providers. Commoditization will enable direct electronic transactions between shippers and carriers. The transactions will need to be dependable, secure, accurate and timely. The Patriot Act means that bankers will soon deny payment for inconsistency among any electronic trade documents.

Companies are realizing they can standardize the interactions and standards through bodies such as the Uni-form Commercial Code, with implicit government buy-in through committees such as COAC. Customs is not hostile to this; it simply hasn't had retail counterparts to lead this effort. Look who has recently been named to COAC, increasing its bias to standards and RFID: seasoned professionals from Pfizer, Wal-Mart and Boeing now join General Motors, The Gap and other big shippers. Claw back 1 percent of their logistics spending and you're talking real money.

Disintermediation follows commoditization when standards incorporate the "intelligence" of the 3PL processes and maintain the business rules that identify the circumstances and requirements for data and documents. Big shippers will be savage in eliminating overhead from their partners and suppliers. Will the carriers throw the 3PLs to the wolves? In a heartbeat.

Gordon Fuller is a director of Covansys Corp., a global consulting and technology services company in Farmington Hills, Mich. He can be contacted at (248) 848-8884 or gfuller@covanysis.com.