Warehousing Value Adds

Supply chain strategy is often designed to eliminate or reduce warehousing. While this trend will no doubt continue as a means to lower total costs and improve efficiency, warehousing can still play an important role and add value. Here are some key areas for managers to consider in improving warehouse operations:

SUPPLY CHAIN STRATEGY:

A major factor in supply chain strategy is inventory turnover. Warehouses enable effective positioning of inventory to support supply chain strategy. This includes raw materials, components for manufacturing, and finished goods inventory. Sound location theory is needed to determine the best warehouse site.

 

BRIDGE BETWEEN 20TH AND 21ST CENTURY MODELS:

Old model characterized by use of intermediaries (middlemen) and staging of inventory throughout the supply chain. Newer model eliminates some nodes and reduces inventory. Faster cycle times put more pressure on logistics systems. This means that positioning of inventory is more important in the newer model.

 

VALUE ADD:

Old logistics models focused only on efficiency and cost control. The challenge for whse mgrs is to achieve efficiency, control costs, and add value. This is done through improving cycle time and managing fulfillment operations.

 

CONTRIBUTION TO PROFIT  +/- :

Bulky commodities tend to occupy the most space in a warehouse and require labor to handle. These commodities usually carry lower value per pound and therefore lower profit margins. They may also be in the mature or declining product life cycles. Warehousing of these products must be efficient to avoid profit drain.

 

 

FINANCIAL CONSIDERATIONS:

Big factor in warehouse decision making is price of real estate. High tech distribution centers with automated handling systems are capital intensive. Labor markets are important to the location decisions. These are examples of strategic decisions made at higher levels of management.

 

PROFESSIONALISM:

While training does exist, there are very few college courses in warehousing. Some literature exists but few text books. Therefore opportunities exist to professionalize the field.

 

 

 

MANAGEMENT:

Most warehouses are labor intensive and variable costs are critical. The whse can be used to provide good front line management experience for new managers. Mid level managers may also be assigned to the whse because of reorganizations and downsizing and their experience can be valuable. The whse should not be used as a dumping ground for problem employees. This will result in lower professionalism.

 

 

LOGISTICS IMPROVEMENTS:

Logistics improvements can be high level supply chain integrations, mid level coordination between manufacturing, marketing, and other intra company functions, or basic improvements in functions. In most companies the warehouse can benefit from some basic improvements. Small changes can have a big impact and can be implemented easily.

Over the Road vs Intermodal

According to Logistics Management magazine many over the road trucking companies are considering or in process of converting operations to intermodal.  There is no question that more traditional truckload and LTL traffic, especially longer haul, is moving on the rails. While these changes can result in significant cost savings and efficiencies, the barriers to conversion are formidable.

 

 

Elements of Intermodal

  • TOFC/COFC   piggyback
  • Landbridge
  • Efficiencies compared to OTR
  • Changing OTR role to more regional service
  • 3PL’s to coordinate movement via multiple modes
  • Mode choice function of total cost, accessibility, speed, capabilities

KPI’s for both OTR and Intermodal

  • Correct Invoicing
  • On Time Delivery
  • % damaged shipments
  • Equipment availability
  • Turndown ratio

OTR Issues

  • Driver shortages
  • Tight capacity
  • Fuel costs
  • Rationalize demand/supply

OTR Advantages

  • Flexibility/accessibility
  • Speed
  • Best option up to 600-700 miles

Trends in OTR

  • TL carriers getting into Intermodal business
  • Shortening length of haul to best use assets (trucks and drivers) and reduce fuel costs
  • Comparison w/Intermodal measured by miles (600-700) or “1 driver, 1 day”

Contact Ad Hoc Logistics for details about:

  • Intermodal and OTR Customer Requirements for all companies and specific requirements for small, medium, and large shippers
  • Barriers to conversion from OTR to Intermodal

 

3PL Contract Optimization

 

Here is a basic outline for negotiating/evaluating 3PL contracts. It should be noted that this outline is a starting point and tactical in nature. It does not address higher level 3PL performance such as full integration with client business strategies and C level involvement.

  • Overview– 3PL should use knowledge and buying power to get best price/terms for services needed
  • Analyze–  Existing agreements, pricing, invoicing practices, benchmark
  • Plan/Organize– RFP development and/or improvement, vendor and carrier evaluations, negotiation strategy, what if scenarios
  • Execute– Implement cost savings plan, re-negotiate existing contracts, develop problem solving protocols
  • Control– Ongoing audit and reporting, regular status reports, quarterly review with vendors and carriers to hold accountable for contract terms

 

Common shipper client complaints:

– Not getting 3PL A team

– Surprise costs

– Lack of ideas and innovation from 3PL

– Lagging in technology

 

While 3PL’s want to be more strategic they are often seen by clients as tactical operators and cost reducers.

Mexican Low Cost Airlines

I recently analyzed the low cost airline market in Mexico, comparing Volaris and Interjet. The overall airline industry in Mexico is dominated by flag carrier Aeromexico with the largest fleet, resulting in many more frequencies than all competitors. Besides Aeromexico, there are a number of low cost and regional airlines competing for domestic passenger traffic. This competition makes it easy to fly to most cities in Mexico at reasonable fares. Low cost carrier Volaris serves approximately 30 destinations in Mexico and 12-15 in the US. Volaris is 2nd to Aeromexico in international market share. Their aggressive growth strategy and aircraft on order (47 in service , 42 on order) will enable Volaris to gain domestic market share from Interjet and possibly international market share from Aeromexico. Interjet serves more cities in Mexico (43) than Volaris but far fewer US cities. A third low cost Mexican carrier, Viva Aerobus serves 27 domestic destinations and has very few US flights. Viva Aerobus has a smaller fleet  so will need to add aircraft in order to gain market share from Volaris or Interjet.

Middle East Logistics Challenges

Ad Hoc Logistics is advising an aerospace company about exports to the Middle East. Air freight and express service into the region is not a problem with a number of options and reliable transit times. The challenges are on the regulatory side as well as movement within countries. The client has experienced customs delays of mission critical shipments so we will be working on three issues:

1) Identify and engage a forwarder with strong capabilities within the region.

2) Identify country specific documents needed for entry.

3) Identify and engage customs brokers in the destination countries to ensure smooth and timely clearance.

Export Control Reform Changes

Gwen Jaramillo Presentation      Initial changes under Export Control Reform are effective today (10/15). Implementation was outlined on Mass Export Website: Countdown To Compliance. Changes include movement of some items from USML to EAR, new license exception STA and other exception updates, AES changes, and 2 new “red flags” in EAR part 732. Exporters are encouraged to review current classifications, properly evaluate products under development, document, and train. Let us know if we can help.

BIS On Line Training

Just completed some  training on EAR regs at bis.gov. Exporters can avoid exposure to fines and penalties by following the procedures outlined on the BIS website. Five types of facts to check:

1) Classification of commodity on Commodities Control List (CCL)…EAR part 774…

2) Destination…EAR part 738…

3) End User…EAR parts 774,764…

4) End Use…ESR part 744…

5) Conduct…ESR part 744…

 

Even if the commodity is not on the CCL, Red Flags for exporters using EAR 99 are:

1) destination country

2) end use

3) end user

 

AST&L

Have been asked to serve on the Education Committee of the American Society of Transportation and Logistics for 2013-2014. The Ed Committee works on issues of certification and re-certification.

AST&L Re-Certification

Completed work for American Society of Transportation and Logistics re-certification program. Our Education subcommittee designed and implemented triennial process for re-certification of the CTL (Certified Transportation and Logistics) professional designation.

Book Review of Blood Iron and Gold: How the Railroads Transformed the World

Book Review Published in Transportation Journal Summer 2011

 

Blood, Iron, and Gold

How the Railroads Transformed the World

By Christian Wolmar

Perseus Book Group

New York, NY

2010

ISBN 978-1-58648-834-5

376 pp.   $28.95

 

 

 

 

Christian Wolmar is a writer who specializes in the social history of railroads and other modes of transport. This unique perspective provides the reader with information about railroad history not usually found in other works.  The narrative takes a global approach, including anecdotes about the construction and operations of most of the major railroads in the world. The book consists of 13 chapters and is well researched with 17 pages of notes.

The first three chapters describe the construction and early operations of railroads in Britain and on the European continent. British technology and capital led development of railroads in Europe and later, through the influence of the Empire, India and Latin America.  Railroads in all countries began as a force for economic development. Less obvious was their military utility. European monarchs certainly recognized the efficiencies in moving troops and supplies by rail. This new form of military transportation also allowed rulers to keep a firm hand on their subjects. In the short term railroads served to consolidate royal power. In the long term, as the author notes, railroads were a democratizing force.  Wolmar provides many interesting anecdotes and facts about the effect of faster transportation on the human race. Isolation and privation gradually give way to urbanization and improved standards of living.

As railways developed gage standards became an issue for debate. Wider gages increased costs of construction and land but resulted in a more comfortable ride for passengers. Narrower gages lowered the cost of construction but resulted in lower speed operations and reduced capacity.  By the mid 19th Century the Stephenson Gage of 4’ 8 ½”, named after the British engineer George Stephenson became the standard. Another topic of much discussion was the “loading gage” which is the size of the envelope needed to accommodate trains, tunnels, platforms, and equipment.

The role of government in establishing railroads differed between Britain and continental Europe.  Nations such as Italy and Germany were fragmented and not completely unified in the 19th Century. As a result railroad planning was controlled by the monarchies in an authoritarian manner.  In Britain and later the US, railroads grew more organically as drivers of economic development aided by public policy.

Chapter 4, The American Way, is lengthy, describing in detail the history of US railroads, especially the transcontinental. As Wolmar explains, the size of the US continent and challenging terrain made railroad construction, especially the transcontinental road, a monumental task. Size and scope alone require devoting a large portion of his book to the US experience. The author contrasts the building of US railroads with earlier projects in Europe. He provides a thorough examination of the new mode of transportation including finance, government involvement, construction, technology, land costs, and military utility. The great champion of the transcontinental railroad was Abraham Lincoln. Even during the Civil War he insisted that planning go forward.  Government involvement in the US was mostly limited to finance and land grants for right of way. Operations of railroads were left to big corporations. As expected, the huge financial sums involved in building the infrastructure resulted in corruption and insider deals. According to Wolmar another distinction between US and Europe was that in Europe the railroads were servants of big business while in a younger US the railroads were creators of business.

While construction in the US was challenging due to distances and terrain, land costs were much cheaper than in Europe.  Crews were able to choose direct routes and avoid obstacles resulting in lower costs per mile and fewer tunnels and bridges than in other countries. This was crucial since less capital was available.

Emerging telegraph technology provided a major improvement in railroad scheduling and operations. As we have already seen in Europe, railroads became a strategic military asset. During the US Civil War trains were used to move troops and supplies. This was a bigger advantage to the union forces because they controlled more miles of track and equipment.

By the late 19th Century railroads in the US had gained an unhealthy amount of power over business and the public. Discriminatory and arbitrary practices led to the establishment of the Interstate Commerce Commission in 1887. An interesting anecdote about this era describes tactics used by American farmers against the railroads. One such tactic was to feed their cows alongside tracks in order to slow or stop trains. Railroads retaliated by installing “cow catchers” on the front of the engines.

By itself, this chapter is a complete and interesting history of railroad development in the US. It is no exaggeration to say that the transcontinental railroad transformed the US from a North/South oriented nation to an East/West nation.

The following three chapters describe epic projects on other parts of the world such the Trans Siberian Railroad. Motivation for such tasks was both economic and political. The more remote the geography the more political will and public financing was necessary. The economic lure was often resource extraction which would not have been possible without railways.

Railroads continued their global expansion with no competition from other modes. Economies transformed from agricultural to industrial. The lives of people all over the world changed dramatically. Diets improved due to greater availability of fruit and vegetables. Before the existence of railroads most people never traveled more than a few miles from home but would soon be able to expand their horizons. All of this had a democratizing effect as the middle class grew worldwide. The negative effects of railroads included near monopolistic power over prices, land values, and routes.

In the final chapters, Wolmar catalogs the post WWII decline of passenger traffic and the financial problems of railroads. Mergers and consolidations lead to big railroad systems in the US and around the world. Intermodal transportation becomes essential to replacing lost passenger revenue enabling railways to survive and prosper in the late 20th Century.

The author’s goal as stated in the Preface was to draw together the history of railways and demonstrate their social impact across the world. Having met this goal in a relatively short book is an impressive piece of writing. The result, however, is a narrative so densely packed with detail that the reader is tempted to skip over large sections in order to maintain interest.  The book is, however, greatly informative and a good addition to any transportation library.

 

Mitchell G. Kostoulakos, CTL

 

 

 

 

 

 

International Logistics Consulting; Licensed Customs Brokers