Swayed by changing market conditions and trends, retailers continue to drive logistics services.
In the wake of the 2009 financial crisis, U.S. liner imports fell 16 percent, exports by 14 percent, and liner companies laid up about 500 containerships. When business picked up later that year and in 2010, many retailers found themselves shut out of vessels and their cargo rolled to later sailings.
That created an opportunity for many non-vessel-operating common carriers to get a foot in the door at retailers desperate to move their cargo.
Keith Andrey, vice president of ocean services at UPS, said some retailers went from “a single direct steamship line contract to balancing their business and including either multiple contracts or potentially including an NVOCC in their strategy.”
Anthony Paik, regional sales manager for the Northeast at Yusen Logistics, noted because of the huge volumes and big diversity of products his firm and other large NVOs carry, they are well-suited to assist shippers with fluctuating cargo volumes.
But with the container shipping industry awash today in surplus capacity, “the expectation, at least for the foreseeable future, is that there won’t be necessarily a tightening of capacity,” said Jess Dankert, director of supply chain for the Retail Industry Leaders Association (RILA). “So there may not be as much of a sense where shippers feel they need to protect themselves.”
Another executive said since liner companies are hungry for revenue, many are taking on smaller accounts than they would have in the past and not offering NVOs rates that are as competitive as in the past.
Still, Andrey said some retailers are hedging their bets by including NVOs in their bids, and Eric Souza, director of product marketing at UPS, added carriers are still employing tactics to reduce capacity with blank sailings, for example around Chinese New Year, so there are weeks when ships sailing from China are nearly 100-percent utilized.
Tony Zasimovich, vice president of international logistics at APL Logistics, said since 2009 retailers have done a better job of managing their supply chains and inventory levels, flowing imports more steadily, so there is a less pronounced peak season in the third quarter.
Ben Hackett, founder of Hackett Associates, which produces the monthly PortTracker report for the National Retail Federation, said “I think shippers have come to realize that with the weekly services and large number of services available they can get their goods in good time.”
(It also has resulted in lower use of air freight, and expedited deliveries by retailers, Zasimovich said, though he noted it’s used for product launches, late production, new releases or demand spikes, particularly for innovative products like new smartphones.)
“No one-size-fits-all retailers,” Dankert said. “Certainly a lot of it is dependent on the complexity of their particular supply chain and the different countries they are dealing with—where they’re importing from and their own particular needs and product lines. So it’s not necessarily something where the same situation will work for all retailers.”
With “retailers at the larger end of the spectrum there is certainly more of a limited use of NVOs. We do start to see that a little more with midsized and smaller retailers, but again it’s not really necessarily determined by the size of retailer,” she said.
Casey Chroust, managing partner of Retail Strategic Ventures in Washington, explained “if you’re a very large retailer your volumes allow you to disintermediate service providers and take more control of the supply chain to drive out costs.”
“If you have the volume, volume talks and because the steamship lines have turned their industry into a commodity, they are able to get a cheaper rate,” added Robert Ambrite, vice president of Hanjin Logistics.
“Small retailers don’t have the manpower or the expertise to control the shipment from the factory and make those decisions all the way to get it to the store,” Chroust said. “They are going to need and they are going to rely on some of these turnkey carriers and providers to perform the services for them.”
But even large retailers will give a portion of their business to 3PLs who can give guaranteed space and equipment in times of capacity pressure, especially with logistics companies that have strong relationships with carriers, Ambrite said. If a space crunch hits, having an NVO in your corner can be a useful tool in making sure that your highest priority goods get moved.
With the planned P3 and G6 mega-alliances having more control over capacity, the 3PLs may become even more valuable in the future, he added.
Another factor in determining whether a retailer will use a 3PL is how much private label merchandise a retailer sells.
“If you are actually choosing the manufacturer, then you have the ability to pick it up at the factory door and move it all the way through the supply chain,” Chroust said. “But if you are buying it from a product supplier, oftentimes you will just pick it up from their distribution center, not at the factory.”
Similarly, companies with very strong brands often control freight into North America and sell on a landed basis both because they are big enough to command attractive freight rates and also because they want to have maximum control over their brand, said Jim McCullen, vice president of information systems at Century Distribution Systems. He also says this is partially a result of practice in the sector—footwear and sportswear companies commonly sell their product in the United States, but some well-known house ware and toy companies sell their goods in Asia.
Some retailers like to buy in Asia because it gives them better visibility into their supply chains. McCullen said retailers will sometimes ask Century to arrange visibility into the supply chain of suppliers who sell their goods on a landed basis.
“They still have to schedule their dock time; they still have to figure out how they are going to get the containers in and unloaded,” he said. If a problem develops, the retailer may be able to change allocations to regional distribution centers and stores or alter a weekly sales flyer if they know far enough in advance.
The decision to use a 3PL may depend on how stable a retailer’s supply chain is. If it sources 70 percent of its goods from China, then it becomes economic for it to have a team there. But if it’s changing sourcing to say, Vietnam, Mexico or Haiti, managing the supply chain in-house may become more difficult and it may make sense to rely on a logistics company that already has staff in those countries, Chroust explained.
Zasimovich said even some of the biggest retailers employ NVOs for part of their business.
NVOs find that it’s not just the ability to offer space, but value-added services such as information, customs house brokerage, co-loading, purchase order management, deconsolidation, warehousing, land transportation, and the ability to offer lower air freight prices in exchange for booking ocean cargo that are paramount to many retailers.
“Even though the space is not so tight, our business is still growing and I think that’s because we are offering service to customers who need it,” Zasimovich said. “A lot of what we do is purchase order management. We are intimately involved in that process.”
APL has a product it calls the “Visual Technology Suite” that can be used to analyze large amounts of data, data that’s recent, and synthesize it into reports so customers can uncover problems in their supply channel.
Paik of Yusen said retailers are seeking to shorten the time between when goods are ordered and arrive in this country.
His company’s origin cargo management system can be used to manage vendors—figure out which suppliers need to be watched more closely so that they stay on schedule, and which ones need more time to complete work. He said such systems are set up to “manage by exception,” so retailers are not overwhelmed with unnecessary information. The product is also used to manage cargo allocation to carriers and routing freight.
Similarly, Century—which is affiliated with “K” Line—has a Visibility Management System that McCullen said allows customers to do “any sort of supply chain management from forecasting out to the suppliers to delivery at their distribution centers.
“Retailers are trying to reduce the number of touch points internally that they need to manage their supply chain,” he said. “Today, many retailers are looking at hundreds of systems internally that are involved in delivering their supply chain.”
Two areas where he sees that happening is when companies upgrade or replace ERP systems such as those offered by SAP or rely more on their 3PLs to provide that management in one system.
Recently, he has seen more retailers look to 3PLs, like Century, to manage regulatory compliance, for example, with Customs and Border Protection. Rather than an internal compliance department to manage, for example, validation of a vendor’s factory, that function is being integrated with systems that handle the physical movement of goods.
Andrey said one of the more successful products in UPS’s ocean portfolio is a supply management product that uses a combination of the analytical capabilities of software and account management teams.
“We’re able to provide them with options both in routing, mode and, in some cases, sourcing locations that can help them make a more cost-based, effective decision.”
He said with its Order Watch product UPS has invested in both technology and by adding subject matter experts. Order Watch allows for better managing of vendor compliance and optimizing container use through services such as buyer consolidation.
While some industries are outsourcing work that was formerly handled by traffic departments, RILA’s Dankert said retailers tend to keep more expertise in-house.
With the “need to quickly get product from its origin to the shelves and ultimately to the consumer, supply chain has become so much more of a focus in recent years as an area for developing or maintaining a competitive edge,” she said.
Discussion about recruiting and retaining supply chain talent is a hot topic in the industry. That’s partly driven by the retirement of baby boomers, but also because retailers are focusing on supply chain as a source of competitive advantage, she said.
Opportunity Abroad. Lisa Harrington, president of the lharrington group and a professor of supply chain management at the University of Maryland, said “the growth in the global middle class and emerging markets is driving tremendous opportunity for retailers. They’re trying to figure out the best way to service those markets, in which they may or may not have experience.”
Some of those challenges are related to distribution infrastructure and whether a retailer has enough warehouse and transportation capacity. Particularly in Asia, she said, this is driving development of hybrid supply chains where faster moving, high-value goods are produced closer to the end consumer, while basic goods not affected by seasonality or fashion trends continue to be made in low-cost Asian locations.
With consumer electronics and so-called fast-fashion goods “it’s become more and more critical to shorten up the supply chain and obviously reduce inventories because of the perishability of the product,” Harrington added. Retailers have an increased need for visibility across their supply chain, so “they can access inventory in a much more responsive way and so that they have the right inventory in the right place.”
She said one service in demand is “postponement,” which is customization of products through packaging or changing of color, for example, for consumer electronic products. The clothing maker Benetton sometimes ships gray goods and then dyes them based on demand patterns.
“This means retailers, suppliers, and carriers have to work much more closely together. They have to basically collaborate and share visibility at a much finer level so that everyone is in sync in order to deliver on this sped-up supply chain,” she said.
Harrington believes retailers are more likely to seek speed from better visibility and information than by demanding faster transit times or shifting cargo to air freight.
McCullen said Century has seen greater interest in the use of bonded logistics parks instead of standard container freight stations in China. When goods enter those parks, they are cleared out of China, giving shippers more flexibility to regroup, kit, or repackage goods and make the decision on where they want to distribute those goods after they enter the park. “It becomes the virtual inventory site for them in China,” he said.
He has also witnessed an increase in the use of “national purchase orders.” Instead of ordering 10,000 units of a product for five different distribution centers, shippers can submit a national purchase order for 50,000 units and meet a vendor’s minimum order quantity and postpone the decision where to send the goods.
Harrington said liner shipping companies may see an increase in regionalized trade flows, whereas long-extended transportation legs may shrink.
“I was in China in July and I met with Maersk. They are very on top of this. With the explosion of the middle class in Asia and the buying power, they see intra-Asia as a huge market for them,” she said. “Companies, like Maersk and DHL, will develop very robust intra-regional capabilities and those will be everything from the base transportation all the way up to very high value-add, final product customization.”
She noted, however, this change is not likely to affect all retail products similarly. She does not expect a huge shift in where televisions, computers and smartphones are made, though she said Apple plans to build a factory in the United States. In the automotive sector, on the other hand, “that regionalization trend is in full force.”
Another trend Harrington foresees gaining traction is shared supply chains, where multiple retailers or manufacturers use shared services such as warehousing and final-mile delivery to retail stores.
“In some cases, they are acknowledging that their supply chains are all pretty much the same and that supply chain itself doesn’t offer enough of a competitive differentiator to warrant having these discrete parallel multiple supply chains serving the same retailer,” she said.
Harrington pointed to collaboration between 3PL Transplace, appliance maker Whirlpool, plastic cup maker Convermex, ladder company Werner Co., and tile maker Dal-Tile. Not only do they sell to many of the same big box retailers, the ability to mix heavy products such as tile with lightweight goods like Styrofoam cups and aluminum ladders allows for optimal use of transportation equipment.
Chroust said some retailers and suppliers are also beginning to work together to match backhauls to drive down transportation costs, and he said some companies that used to insist on doing distribution themselves to large retailers (in part to help subsidize the cost of serving smaller stores) have agreed to deliver to the distribution centers of large retailers.
After the Great Recession, he said retailers “looked at every possible avenue to take costs out of the supply chain and that search has presented new partnerships that were unheard of prior to this.”
Near-sourcing. Dankert said while there has been lot of discussion and interest in near-sourcing products from Mexico and Central America, “I don’t know that as much of it has happened as maybe the media had necessarily projected.”
But retailers “are certainly investigating opportunities to reduce transportation costs and increase time to market… It is not something that will necessarily happen overnight,” she said.
UPS is experiencing a lot of near-sourcing inquiries, specifically into Mexico, as labor rates in Eastern China rise.
“Reducing cost is obviously very important to retailers, especially since their mature markets are struggling with sluggish and uncertain growth,” Souza said. While some retailers are sourcing more from Vietnam, China’s interior, and places such as Sri Lanka, he said some of these geographic changes may be driven more by “retailers looking at emerging markets as ways to grow their business.”
