Speeding Global Shipments

The global air cargo sector is enjoying some good times. Speed is on everyone’s mind—whether it’s accelerating production cycles, delivering product to market faster, or supporting expensive assets in the field. Manufacturers, retailers, and distributors are all looking at how they can expedite their global supply chains, but in a way that makes good economic sense.

Airfreight industry numbers reflect these trends. The first five months of 2004 saw a nearly 11-percent increase in worldwide traffic compared with the same period in 2003, according the 2004-2005 World Air Cargo Forecast prepared by Boeing Company.

For the entire year 2003, the world air cargo market showed surprising strength with annual growth of nearly four percent—despite the challenges of a major Middle East conflict, as well as the severe acute respiratory syndrome (SARS) crisis. Boeing predicts world air cargo traffic will expand at an average annual rate of six percent for the next two decades, tripling current traffic levels.

Not surprisingly, the study predicts Asian airfreight markets will continue to lead the world air cargo industry in average annual growth rates, with the domestic Chinese and intra-Asian markets expanding some 10 percent and eight percent per year, respectively.

But the interesting story about the global air/expedited freight sector is not the numbers—it is the trends and issues driving those numbers.

From the 30,000-foot high perspective, “the world has evolved from a collection of national economies with import/export activity to a global economy,” says Satish Jindel, an air industry economist and principal, SJ Consulting, Pittsburgh. “We have gone far beyond just import/export. A U.S. shoe manufacturer may buy leather in Brazil, ship it to China to manufacture shoes, then import the finished product to the United States for sale. This behavior creates a complex criss-cross flow of goods around the globe, occurring on a greater order of magnitude than ever before.”

Companies shift sourcing and manufacturing locations around the world in their continual search for better and/or less expensive raw materials, components, labor, and production capacity.

“In the past,” observes Carl Asmus, vice president international marketing, FedEx Express, “a U.S. manufacturer would have geographically centralized suppliers, making it relatively simple to manage that supply chain, to pull components of various suppliers into a final assembly point. That’s no longer the case.”

At the same time that businesses are expanding their global supply chains, they are reducing inventory—substantially wherever possible.

“Companies have cut way back on the amount of inventory they are willing to have on hand,” says Asmus. “They have removed the cost of holding a lot of inventory, and at the same time increased the velocity of what they do hold. This strategy reduces inventory carrying cost, including warehousing and handling.”

Leaner inventories have one down side, however. They make supply chains significantly more sensitive to obstruction and interruption. Take seaport congestion, for example. At certain U.S. seaports, the issue of congestion has become a critical problem. West Coast ports—Los Angeles/Long Beach in particular—are swamped by rapidly escalating volumes of inbound freight coming from China and other manufacturing centers in Asia.

Because of their deep-draft requirements, the 7,000-TEU mega-ships that carry these goods can only call at a limited number of ports. They are too big to go through the Panama Canal to reach eastern U.S. markets. Consequently, they crowd into West Coast ports, Long Beach in particular. Inland rail and truck capacity is insufficient to carry the volume eastward, so freight backs up at the port.

“I was out in Long Beach recently, and there were 90 ships waiting to be unloaded,” Asmus says. “Companies are sitting with freight on ships stuck in this traffic jam, and there’s nothing they can do to get it off.”

These ocean service delays are significant enough to change the economics of the transportation decision. “These delays push shipments to air that would normally have stayed with ocean,” Jindel says. “The cost to carry that inventory over the extended time becomes too great. And many products are season-sensitive. Delays mean missed sales, marked-down prices, and reduced profit margins. It comes down to being able to put products on the shelf for sale as opposed to putting those same products on sale.”

One other element—ocean container security—could impact shippers’ modal choice going forward. “Right now,” Jindel says, “about five percent of cargo containers imported to the United States are randomly screened.”

There’s talk about increasing that percentage, and Jindel believes if inspections move higher than five percent, “ocean service providers will be challenged from a technology standpoint to provide the required advance notice to customs. Resulting delays could cause further diversion from ocean to air.”

Escalating security requirements is a phenomenon that will only intensify over time. For example, C-TPAT (Customs-Trade Partnership Against Terrorism) certification is becoming a condition of doing business for a lot of large companies, according to E. Joseph Bento, president, North America and chief marketing officer, EGL Eagle Global Logistics.

“These companies want to know whether you are C-TPAT validated,” he says. “If you’re not, it throws up a red flag.” Bento believes the

C-TPAT certification model ultimately will become the world model for validating the security preparedness of supply chain service providers.

One-Stop Shopping

As the economy skews increasingly global, shippers must deal with product coming from many different countries—each with its own set of regulations and customs clearance procedures. The complexity inherent in global commerce is a headache more and more companies want to avoid. They look to outside logistics service providers to assume these responsibilities, seeking a one-stop shopping supply chain solution.

“Ten years ago,” Asmus notes, “shippers were willing to manage more individual components of the supply chain than they are today. Our customers are asking us to take on more responsibility for coordinating movements from order entry to pick and pack to transportation to delivery.”

At the same time, companies want to be able to change and modify their supply chains as needed—sometimes on a weekly basis. “They expect carriers to adapt to such change—to have the global reach and network to accommodate it,” says Asmus. “That requirement will only increase in importance.”

As air cargo service providers meet their customers’ needs, the traditional boundaries that defined various classes of air freight are blurring.

“The distinction between express and general air cargo continues to blur as traditional providers expand their time-definite offerings, air cargo firms consolidate, and postal authorities make inroads as full-fledged ‘logistics providers,'” the Boeing study reports.

“There used to be a clear distinction between express package movement and air freight,” says Asmus, agreeing with the study. “Shippers and airlines had their own definition of what constituted freight—70 pounds, 150 pounds.

“Today, shippers don’t want to move shipments weighing less than 150 pounds with one operator, and move the rest with a freight forwarder. They want a single entity to handle all their shipments, whether they are five pounds or 500 pounds.”

Deferred is Disappearing

Deferred air freight as a service option is also disappearing. “It doesn’t pay anymore to hold cargo to consolidate it into larger shipments and offer deferred air service,” notes Brian Gillen, vice president international sales, Pilot Air Freight.

“All our airfreight customers are load and go. They make the decision to put their freight onto air because they need to meet a production deadline or service emergency, or they are shipping to order. They’re not interesting in holding it for an extra day just to get an incrementally better rate.”

To accommodate shippers’ desire for one-stop shopping service in the global airfreight market, service providers are doing two things: growing capacity internally/organically, and acquiring capabilities through mergers, acquisitions, partnerships, and alliances.

FedEx, UPS, and other providers now offer door-to-door management of global supply chain flows from start to finish. “Companies want a preferred provider to manage customs, brokerage, transport optimization, and other functions,” notes Jindel.

Recent industry news reflects this: UPS and FedEx are now NVOCCs (non-vessel-operating common carriers that can offer service contracts to shippers). UPS acquired Menlo Forwarding to secure a presence in the freight forwarding side for heavy shipments around the globe. And UPS has gone one step further, offering banking services and handling letters of credit for customers.

Says Jindel about UPS, “They reason, ‘We’re managing the physical movement, so why not handle the financial transaction as well?’

“We see other companies pursuing both strategies—growing organically and also expanding through mergers/acquisitions,” he adds. “The nature of the expansion depends in part on the complexities in the market.

Look at Southeast Asia, for example. The way the government operates, the cultural differences, the logistics challenges in those countries—all these factors make acquisition a more viable alternative to organic growth. Acquisition provides immediate domain knowledge as to how supply chains work in those countries, plus speed to market. Growing such expertise internally is too slow a process.”

Still other service providers are addressing shipper demand for one-stop shopping by banding together in alliances to deliver the needed services and coverage. In February 2004, for example, a group of global freight forwarders launched the World Freight Alliance (WFA).

Led by Pilot Air Freight, this alliance “provides shippers the efficiencies of a forwarding network along with complete cross-continent, real-time tracking and tracing,” according to Richard Phillips, chairman, president and CEO of Pilot Air Freight. WFA members include independent freight companies from North America, South America, Europe, Asia, Africa, and Australia.

“Growing demand from large multinational shippers led us to create a solution that allows shippers to schedule and track freight cross-platform, from all points serviced by the Alliance,” explains Phillips. “The WFA has one web site, which will serve the tracking and monitoring needs of all our customers.

“WFA providers bring an indigenous understanding of local business practices—an increasingly important consideration at a time of tightening security, increased local regulation, and mounting risk,” Phillips says. Collectively, the WFA’s footprint includes more than 10,000 airports and locations worldwide, including developed and developing nations.

And not to be left behind, the airlines have their own brand of alliance structures. SkyTeam Cargo, for instance, is a global airline cargo alliance consisting of KLM Cargo, Aeroméxico Cargo, Air France Cargo, Delta Air Logistics, Korean Air Cargo, Alitalia Cargo, and CSA Czech Airlines Cargo. SkyTeam Cargo offers shippers a worldwide system of more than 500 destinations in 110 unduplicated countries.

Moving the freight is only half the equation when it comes to global shipments. “The other half,” notes Gillen, “is information.”

Companies want to know the exact status of their supply chain at any given moment. They want service providers that can offer complete visibility from beginning to the end of the transaction. Such capabilities are tremendously valuable and can be a deciding factor in a shipper’s selection of a global air/expedited service provider.

“In the old airfreight model,” Asmus recalls, “the forwarder hired a cartage company to pick up a shipment, move it to his location, build a pallet, tender it to a passenger carrier that delivered it to a cartage company warehouse on the other end, and then on to the end receiver.

“The cargo passed through a number of hands—and through a number of information systems, none of which were linked. To find out where your freight was, you had to call the forwarder, who then started a telephone chain to all the other players to find out the status.”

This telephone-tag system is no longer acceptable to shippers.

The information needs and timeliness vary depending on the air service being offered. For Menlo Worldwide Expedite, which operates under extreme time pressures, real-time information is critical. Menlo Worldwide Expedite provides urgent transportation, primarily same-day shipments.

“When things go wrong, when the supply chain breaks down, that’s when we’re called in,” says David Quin, president of the company. “When an aircraft is grounded for repairs, you have to get it up and flying again ASAP. That’s where we come in. We are a necessary evil. Our customers wouldn’t use us if they didn’t have to.”

The average life of a Menlo Worldwide Expedite shipment is just eight hours. “This means we have to know where the freight is every step of the way,” Quin says. “There’s no room for error.”

To gain this visibility, Menlo has invested substantially in what Quin calls “the bleeding edge” of technology.

“We have an extremely sophisticated IT platform based on a milestone management concept, where each shipment has six milestones,” he explains. “We have status information within 15 minutes of passing each milestone. Within 15 minutes of pickup, for example, our driver records the event into our system. Our consignees can log on and watch their shipment as its timeline moves forward.”

Pinpointing Aircraft

Menlo Worldwide Expedite, which was recently acquired by UPS, is linked to the Federal Aviation Authority’s global satellite tracking service. Through this system, the expedited service provider can pinpoint the in-transit location of all aircraft and flights at any given time.

“We can tell the speed the aircraft is traveling, where it is, and when it reaches its destination,” Quin says.

While most global air service customers don’t need such immediate, real-time shipment status, they do want ongoing visibility into their freight.

“Shippers want to see us proactively watching the flow of their business,” says Bento of EGL Eagle Global Logistics. “Anything that breaks that flow creates a problem. Shippers want exception alerts—whether the issue is a financial problem, shipment delay, damage, or customer problem. They want to know about it as soon as possible so they can adjust their supply chain to accommodate it.”

Pilot Air Freight can also link up with its customers’ order entry system to gain visibility into upcoming freight volumes. “By having this information ahead of time,” says Gillen, “we can project customers’ need for air freight earlier on in the supply chain planning cycle. This lets us do a better job of managing their shipments.”

Air cargo transportation has always been about trade-offs—balancing the cost of transport against the cost of carrying inventory, or the cost of a service failure or production line shutdown.

As companies’ supply chains have become more intricate and geographically extended, however, their needs have changed. Businesses want supply chain service partners to help them navigate this complexity—to manage the movement of product and information door to door.

The global air sector is evolving to deliver service that meets this broader set of expectations.